Here's Why We're Watching MAYO Human Capital's (GTSM:6738) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for MAYO Human Capital (GTSM:6738) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for MAYO Human Capital

How Long Is MAYO Human Capital's Cash Runway?

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. When MAYO Human Capital last reported its balance sheet in June 2020, it had zero debt and cash worth NT$72m. In the last year, its cash burn was NT$121m. So it had a cash runway of approximately 7 months from June 2020. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.

How Well Is MAYO Human Capital Growing?

MAYO Human Capital boosted investment sharply in the last year, with cash burn ramping by 55%. While that isa little concerning at a glance, the company has a track record of recent growth, evidenced by the impressive 80% growth in revenue, over the very same year. 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. You can take a look at how MAYO Human Capital is growing revenue over time by checking this visualization of past revenue growth.

How Hard Would It Be For MAYO Human Capital To Raise More Cash For Growth?

Given the trajectory of MAYO Human Capital's cash burn, many investors will already be thinking about how it might raise more cash in the future. Companies can raise capital through either debt or equity. 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 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).

MAYO Human Capital has a market capitalisation of NT$1.0b and burnt through NT$121m last year, which is 12% of the company's market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

How Risky Is MAYO Human Capital's Cash Burn Situation?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought MAYO Human Capital's revenue growth was relatively promising. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. Taking a deeper dive, we've spotted 5 warning signs for MAYO Human Capital you should be aware of, and 1 of them shouldn't be ignored.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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