We're Not Worried About Perfect's (NYSE:PERF) Cash Burn

There's no doubt that money can be made by owning shares of unprofitable businesses. 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 Perfect (NYSE:PERF) shareholders should 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Perfect

Does Perfect 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 Perfect last reported its balance sheet in September 2022, it had zero debt and cash worth US$84m. In the last year, its cash burn was US$2.6m. So it had a very long cash runway of many years from September 2022. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. The image below shows how its cash balance has been changing over the last few years.

Is Perfect's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Perfect actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. We think that it's fairly positive to see that revenue grew 27% in the last twelve months. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Hard Would It Be For Perfect To Raise More Cash For Growth?

Notwithstanding Perfect's revenue growth, it is still important to consider how it could raise more money, if it needs to. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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).

Since it has a market capitalisation of US$843m, Perfect's US$2.6m in cash burn equates to about 0.3% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

How Risky Is Perfect's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Perfect is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. But it's fair to say that its revenue growth was also very reassuring. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 1 warning sign for Perfect that investors should know when investing in the stock.

Of course Perfect may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.