Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we'd take a look at whether Mosel Vitelic (TPE:2342) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
When Might Mosel Vitelic Run Out Of Money?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at September 2020, Mosel Vitelic had cash of NT$924m and no debt. Importantly, its cash burn was NT$53m over the trailing twelve months. So it had a very long cash runway of many years from September 2020. Importantly, though, the one analyst we see covering the stock thinks that Mosel Vitelic will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.
How Well Is Mosel Vitelic Growing?
At first glance it's a bit worrying to see that Mosel Vitelic actually boosted its cash burn by 38%, year on year. The silver lining is that revenue was up 25%, showing the business is growing at the top line. On balance, we'd say the company is improving over time. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Mosel Vitelic has developed its business over time by checking this visualization of its revenue and earnings history.
How Easily Can Mosel Vitelic Raise Cash?
We are certainly impressed with the progress Mosel Vitelic has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Mosel Vitelic has a market capitalisation of NT$5.3b and burnt through NT$53m last year, which is 1.0% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
How Risky Is Mosel Vitelic's Cash Burn Situation?
It may already be apparent to you that we're relatively comfortable with the way Mosel Vitelic is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. There's no doubt that shareholders can take a lot of heart from the fact that at least one analyst is forecasting it will reach breakeven before too long. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. We think it's very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what Mosel Vitelic's CEO gets paid each year.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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