Is Pixelworks (NASDAQ:PXLW) In A Good Position To Deliver On Growth Plans?

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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Pixelworks (NASDAQ:PXLW) 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. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Pixelworks

When Might Pixelworks Run Out Of Money?

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. In September 2023, Pixelworks had US$50m in cash, and was debt-free. Importantly, its cash burn was US$22m over the trailing twelve months. That means it had a cash runway of about 2.3 years as of September 2023. That's decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.

How Well Is Pixelworks Growing?

At first glance it's a bit worrying to see that Pixelworks actually boosted its cash burn by 2.5%, year on year. And we must say we find it concerning that operating revenue dropped 19% over the same period. Considering both these metrics, we're a little concerned about how the company is developing. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

Can Pixelworks Raise More Cash Easily?

Pixelworks seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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).

Pixelworks' cash burn of US$22m is about 23% of its US$96m market capitalisation. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

Is Pixelworks' Cash Burn A Worry?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Pixelworks' cash runway 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. An in-depth examination of risks revealed 3 warning signs for Pixelworks that readers should think about before committing capital to this stock.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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.