Dexin (GTSM:3349) Is In A Good Position To Deliver On Growth Plans

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, Dexin (GTSM:3349) shareholders have done very well over the last year, with the share price soaring by 141%. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

In light of its strong share price run, we think now is a good time to investigate how risky Dexin's cash burn is. 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. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for Dexin

When Might Dexin Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2020, Dexin had NT$217m in cash, and was debt-free. Importantly, its cash burn was NT$25m over the trailing twelve months. Therefore, from June 2020 it had 8.7 years of cash runway. 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.

Is Dexin's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Dexin actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Unfortunately, the last year has been a disappointment, with operating revenue dropping 42% during the period. In reality, this article only makes a short study of the company's growth data. You can take a look at how Dexin has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Dexin Raise Cash?

Given its problematic fall in revenue, Dexin shareholders should consider how the company could fund its growth, if it turns out it needs more cash. 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 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.

Dexin's cash burn of NT$25m is about 4.0% of its NT$629m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

Is Dexin's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Dexin is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Although we do find its falling revenue to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. 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. On another note, Dexin has 3 warning signs (and 1 which is potentially serious) we think you should know about.

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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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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