Yahoo Finance Here's Why We're Not Too Worried About Emerson Radio's (NYSEMKT:MSN) Cash Burn Situation
Just because a business does not make any money, does not mean that the stock will go down. 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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given this risk, we thought we'd take a look at whether Emerson Radio (NYSEMKT:MSN) 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'.
Check out our latest analysis for Emerson Radio
How Long Is Emerson Radio's 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. When Emerson Radio last reported its balance sheet in December 2019, it had zero debt and cash worth US$34m. Looking at the last year, the company burnt through US$1.5m. That means it had a cash runway of very many years as of December 2019. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.
How Well Is Emerson Radio Growing?
We reckon the fact that Emerson Radio managed to shrink its cash burn by 47% over the last year is rather encouraging. But the revenue dip of 41% in the same period was a bit concerning. In light of the data above, we're fairly sanguine about the business growth trajectory. In reality, this article only makes a short study of the company's growth data. You can take a look at how Emerson Radio has developed its business over time by checking this visualization of its revenue and earnings history.
How Hard Would It Be For Emerson Radio To Raise More Cash For Growth?
We are certainly impressed with the progress Emerson Radio has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. 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 to fund 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$14m, Emerson Radio's US$1.5m in cash burn equates to about 10% 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 Emerson Radio's Cash Burn A Worry?
It may already be apparent to you that we're relatively comfortable with the way Emerson Radio is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Although we do find its falling revenue to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, Emerson Radio has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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