There's no doubt that money can be made by owning shares of unprofitable businesses. For example, ThroughTek (GTSM:6565) shareholders have done very well over the last year, with the share price soaring by 141%. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
In light of its strong share price run, we think now is a good time to investigate how risky ThroughTek's cash burn is. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). Let's start with an examination of the business' cash, relative to its cash burn.
Check out our latest analysis for ThroughTek
When Might ThroughTek Run Out Of Money?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When ThroughTek last reported its balance sheet in June 2020, it had zero debt and cash worth NT$139m. In the last year, its cash burn was NT$13m. That means it had a cash runway of very many years as of June 2020. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. Depicted below, you can see how its cash holdings have changed over time.
How Well Is ThroughTek Growing?
ThroughTek managed to reduce its cash burn by 56% over the last twelve months, which suggests it's on the right flight path. This reduction was no doubt supported by its strong revenue growth of 61% in the same period. Overall, we'd say its growth is rather impressive. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic revenue growth shows how ThroughTek is building its business over time.
How Easily Can ThroughTek Raise Cash?
There's no doubt ThroughTek seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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).
ThroughTek has a market capitalisation of NT$624m and burnt through NT$13m last year, which is 2.1% 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.
So, Should We Worry About ThroughTek's Cash Burn?
It may already be apparent to you that we're relatively comfortable with the way ThroughTek is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. But it's fair to say that its cash burn reduction was also very reassuring. 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. An in-depth examination of risks revealed 2 warning signs for ThroughTek that readers should think about before committing capital to this stock.
Of course ThroughTek 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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