We're Keeping An Eye On Aehr Test Systems's (NASDAQ:AEHR) Cash Burn Rate

By
Simply Wall St
Published
September 16, 2019
NasdaqCM:AEHR

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 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Aehr Test Systems (NASDAQ:AEHR) shareholders be worried about its cash burn? In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Aehr Test Systems

Does Aehr Test Systems Have A Long Cash Runway?

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. In May 2019, Aehr Test Systems had US$5.4m in cash, and was debt-free. In the last year, its cash burn was US$5.8m. That means it had a cash runway of around 11 months as of May 2019. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.

NasdaqCM:AEHR Historical Debt, September 16th 2019
NasdaqCM:AEHR Historical Debt, September 16th 2019

How Well Is Aehr Test Systems Growing?

It was quite stunning to see that Aehr Test Systems increased its cash burn by 202% over the last year. As if that's not bad enough, the operating revenue also dropped by 29%, making us very wary indeed. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

Can Aehr Test Systems Raise More Cash Easily?

Aehr Test Systems revenue is declining and its cash burn is increasing, so many may be considering its need to raise more cash in the future. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.

Aehr Test Systems has a market capitalisation of US$32m and burnt through US$5.8m last year, which is 18% 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 probably at the cost of some dilution.

So, Should We Worry About Aehr Test Systems's Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Aehr Test Systems's cash burn relative to its market cap was truly promising. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. We think it's very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what Aehr Test Systems's CEO gets paid each year.

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)

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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