We're Hopeful That AYO Technology Solutions (JSE:AYO) Will Use Its Cash Wisely

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given this risk, we thought we'd take a look at whether AYO Technology Solutions (JSE:AYO) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for AYO Technology Solutions

How Long Is AYO Technology Solutions' 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. As at August 2022, AYO Technology Solutions had cash of R1.3b and such minimal debt that we can ignore it for the purposes of this analysis. Importantly, its cash burn was R191m over the trailing twelve months. Therefore, from August 2022 it had 7.0 years of cash runway. 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. Depicted below, you can see how its cash holdings have changed over time.

How Well Is AYO Technology Solutions Growing?

It was fairly positive to see that AYO Technology Solutions reduced its cash burn by 34% during the last year. And operating revenue was up by 3.3% too. On balance, we'd say the company is improving over time. In reality, this article only makes a short study of the company's growth data. You can take a look at how AYO Technology Solutions has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For AYO Technology Solutions To Raise More Cash For Growth?

While AYO Technology Solutions seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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).

Since it has a market capitalisation of R1.0b, AYO Technology Solutions' R191m in cash burn equates to about 19% of its market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

Is AYO Technology Solutions' Cash Burn A Worry?

The good news is that in our view AYO Technology Solutions' cash burn situation gives shareholders real reason for optimism. Not only was its cash burn reduction quite good, but its cash runway was a real positive. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. On another note, AYO Technology Solutions has 4 warning signs (and 3 which can't be ignored) we think you should know about.

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.