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Companies Like Synectics (LON:SNX) Are In A Position 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 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 Synectics (LON:SNX) 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for Synectics

How Long Is Synectics' 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 November 2021, Synectics had cash of UK£4.6m and no debt. Importantly, its cash burn was UK£1.5m over the trailing twelve months. That means it had a cash runway of about 3.1 years as of November 2021. There's no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
debt-equity-history-analysis

Is Synectics' Revenue Growing?

Given that Synectics actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 2.4%. 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.

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

Given its problematic fall in revenue, Synectics 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. Commonly, a business will sell new shares in itself to raise cash and drive 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 UK£22m, Synectics' UK£1.5m in cash burn equates to about 6.9% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

How Risky Is Synectics' Cash Burn Situation?

As you can probably tell by now, we're not too worried about Synectics' cash burn. In particular, we think its cash runway 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. 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. Taking an in-depth view of risks, we've identified 2 warning signs for Synectics that you should be aware of before investing.

Of course Synectics 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.