Stock Analysis

We're Hopeful That Mosel Vitelic (TPE:2342) Will Use Its Cash Wisely

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TWSE:2342
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There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Mosel Vitelic (TPE:2342) shareholders is whether they should be concerned by its rate of 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'.

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How Long Is Mosel Vitelic's Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. 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. That means it had a cash runway of very many years as of September 2020. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
TSEC:2342 Debt to Equity History March 15th 2021

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 good news is that operating revenue increased by 25% in the last year, indicating that the business is gaining some traction. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Mosel Vitelic is building its business over time.

Can Mosel Vitelic Raise More Cash Easily?

While Mosel Vitelic seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Mosel Vitelic's cash burn of NT$53m is about 0.9% of its NT$6.0b market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

Is Mosel Vitelic's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Mosel Vitelic's cash burn. 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. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. For us, it's always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the Mosel Vitelic CEO receives in total remuneration.

Of course Mosel Vitelic may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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About TWSE:2342

Mosel Vitelic

Mosel Vitelic Inc. manufactures and sells power semiconductor components and power management ICs in Taiwan.

Flawless balance sheet with outstanding track record.

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