We're Not Very Worried About Digimarc's (NASDAQ:DMRC) Cash Burn Rate

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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given this risk, we thought we'd take a look at whether Digimarc (NASDAQ:DMRC) 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'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Digimarc

When Might Digimarc Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2024, Digimarc had cash of US$41m and no debt. In the last year, its cash burn was US$22m. Therefore, from June 2024 it had roughly 23 months of cash runway. Importantly, analysts think that Digimarc will reach cashflow breakeven in 3 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Digimarc Growing?

It was fairly positive to see that Digimarc reduced its cash burn by 40% during the last year. On top of that, operating revenue was up 22%, making for a heartening combination It seems to be growing nicely. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can Digimarc Raise More Cash Easily?

While Digimarc 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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.

Digimarc has a market capitalisation of US$595m and burnt through US$22m last year, which is 3.6% of the company's 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 Digimarc's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Digimarc is burning through its cash. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. Its revenue growth wasn't quite as good, but was still rather encouraging! One real positive is that analysts are forecasting that the company will reach breakeven. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for Digimarc that investors should know when investing in the stock.

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. 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.