Yahoo Finance Companies Like SimiGon (LON:SIM) Can Afford To Invest In Growth
There's no doubt that money can be made by owning shares of unprofitable businesses. 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 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 SimiGon (LON:SIM) 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'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
View our latest analysis for SimiGon
When Might SimiGon 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 December 2019, SimiGon had US$6.0m in cash, and was debt-free. Looking at the last year, the company burnt through US$22k. So it had a very long cash runway of many years from December 2019. 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.
How Well Is SimiGon Growing?
SimiGon managed to reduce its cash burn by 99% over the last twelve months, which is extremely promising, when it comes to considering its need for cash. But it was a bit disconcerting to see operating revenue down 2.9% in that time. It seems to be growing nicely. In reality, this article only makes a short study of the company's growth data. You can take a look at how SimiGon has developed its business over time by checking this visualization of its revenue and earnings history.
How Easily Can SimiGon Raise Cash?
While SimiGon 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. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Since it has a market capitalisation of US$4.1m, SimiGon's US$22k in cash burn equates to about 0.5% of its 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.
So, Should We Worry About SimiGon's Cash Burn?
As you can probably tell by now, we're not too worried about SimiGon's cash burn. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. 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. On another note, SimiGon has 3 warning signs (and 2 which make us uncomfortable) we think you should know about.
Of course SimiGon 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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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