UTStarcom Holdings (NASDAQ:UTSI) Is In A Strong Position To Grow Its Business

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

So, the natural question for UTStarcom Holdings (NASDAQ:UTSI) shareholders is whether they should be concerned by its rate of 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'.

Check out our latest analysis for UTStarcom Holdings

When Might UTStarcom Holdings Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When UTStarcom Holdings last reported its balance sheet in June 2023, it had zero debt and cash worth US$49m. Looking at the last year, the company burnt through US$745k. That means it had a cash runway of very many years as of June 2023. 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. You can see how its cash balance has changed over time in the image below.

Is UTStarcom Holdings' Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because UTStarcom Holdings actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Unfortunately, the last year has been a disappointment, with operating revenue dropping 11% during the period. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how UTStarcom Holdings has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can UTStarcom Holdings Raise Cash?

Given its problematic fall in revenue, UTStarcom Holdings shareholders should consider how the company could fund its growth, if it turns out it needs more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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).

UTStarcom Holdings has a market capitalisation of US$34m and burnt through US$745k last year, which is 2.2% of the company's market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

Is UTStarcom Holdings' Cash Burn A Worry?

As you can probably tell by now, we're not too worried about UTStarcom Holdings' cash burn. For example, we think its cash runway suggests that the company is on a good path. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Taking a deeper dive, we've spotted 3 warning signs for UTStarcom Holdings you should be aware of, and 1 of them can't be ignored.

Of course UTStarcom Holdings 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.

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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.