Yahoo Finance Here's Why We're Not At All Concerned With EcoSynthetix's (TSE:ECO) Cash Burn Situation
Just because a business does not make any money, does not mean that the stock will go down. 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?
So should EcoSynthetix (TSE:ECO) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called 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 EcoSynthetix
How Long Is EcoSynthetix's Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. EcoSynthetix has such a small amount of debt that we'll set it aside, and focus on the US$42m in cash it held at December 2020. Looking at the last year, the company burnt through US$21k. That means it had a cash runway of very many years as of December 2020. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.
Is EcoSynthetix's Revenue Growing?
We're hesitant to extrapolate on the recent trend to assess its cash burn, because EcoSynthetix 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 26% during the period. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how EcoSynthetix is building its business over time.
How Hard Would It Be For EcoSynthetix To Raise More Cash For Growth?
Given its problematic fall in revenue, EcoSynthetix shareholders should consider how the company could fund its growth, if it turns out it needs more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.
EcoSynthetix has a market capitalisation of US$216m and burnt through US$21k last year, which is 0.01% 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.
So, Should We Worry About EcoSynthetix's Cash Burn?
As you can probably tell by now, we're not too worried about EcoSynthetix's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While its falling revenue wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. 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. An in-depth examination of risks revealed 2 warning signs for EcoSynthetix that readers should think about before committing capital to this stock.
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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. 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.
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