We can readily understand why investors are attracted to unprofitable companies. 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.
Given this risk, we thought we’d take a look at whether SCWorx (NASDAQ:WORX) shareholders should be worried about its cash burn. In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
How Long Is SCWorx’s Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. When SCWorx last reported its balance sheet in September 2019, it had zero debt and cash worth US$1.0m. In the last year, its cash burn was US$5.0m. That means it had a cash runway of around 2 months as of September 2019. With a cash runway that short, we strongly believe that the company must raise cash or else douse its cash burn promptly. You can see how its cash balance has changed over time in the image below.
Is SCWorx’s Revenue Growing?
We’re hesitant to extrapolate on the recent trend to assess its cash burn, because SCWorx actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. As it happens, shareholders have good reason to be optimistic about the future since the company increased its operating revenue by 57% over the last year. In reality, this article only makes a short study of the company’s growth data. This graph of historic revenue growth shows how SCWorx is building its business over time.
How Easily Can SCWorx Raise Cash?
There’s no doubt SCWorx’s revenue growth is impressive but even if it’s only hypothetical, it’s always worth asking how easily it could raise more money to fund further 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 to fund growth. We can compare a company’s cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year’s operations.
Since it has a market capitalisation of US$15m, SCWorx’s US$5.0m in cash burn equates to about 33% of its market value. That’s not insignificant, and if the company had to sell enough shares to fund another year’s growth at the current share price, you’d likely witness fairly costly dilution.
Is SCWorx’s Cash Burn A Worry?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought SCWorx’s revenue growth was relatively promising. After considering the data discussed in this article, we don’t have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon. Notably, our data indicates that SCWorx insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
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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