Here's Why We're Not Too Worried About Compal Broadband Networks' (TWSE:6674) Cash Burn Situation

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, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Compal Broadband Networks (TWSE:6674) 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'.

View our latest analysis for Compal Broadband Networks

Does Compal Broadband Networks Have A Long 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 Compal Broadband Networks last reported its March 2024 balance sheet in May 2024, it had zero debt and cash worth NT$463m. In the last year, its cash burn was NT$97m. Therefore, from March 2024 it had 4.8 years of cash runway. A runway of this length affords the company the time and space it needs to develop the business. The image below shows how its cash balance has been changing over the last few years.

How Well Is Compal Broadband Networks Growing?

It was fairly positive to see that Compal Broadband Networks reduced its cash burn by 41% during the last year. But the revenue dip of 47% in the same period was a bit concerning. In light of the data above, we're fairly sanguine about the business growth trajectory. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Compal Broadband Networks is building its business over time.

Can Compal Broadband Networks Raise More Cash Easily?

While Compal Broadband Networks seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. 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.

Since it has a market capitalisation of NT$1.6b, Compal Broadband Networks' NT$97m in cash burn equates to about 6.1% of its market value. 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.

So, Should We Worry About Compal Broadband Networks' Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Compal Broadband Networks is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While we must concede that its falling revenue is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. On another note, Compal Broadband Networks has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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