Yahoo Finance We're Hopeful That Redline Communications Group (TSE:RDL) 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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for Redline Communications Group (TSE:RDL) shareholders is whether they should be concerned by its rate of 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Check out our latest analysis for Redline Communications Group
When Might Redline Communications Group Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at March 2020, Redline Communications Group had cash of US$6.8m and no debt. Looking at the last year, the company burnt through US$1.5m. That means it had a cash runway of about 4.7 years as of March 2020. A runway of this length affords the company the time and space it needs to develop the business. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Redline Communications Group Growing?
Some investors might find it troubling that Redline Communications Group is actually increasing its cash burn, which is up 30% in the last year. Also concerning, operating revenue was actually down by 18% in that time. Taken together, we think these growth metrics are a little worrying. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Redline Communications Group has developed its business over time by checking this visualization of its revenue and earnings history.
Can Redline Communications Group Raise More Cash Easily?
Redline Communications Group seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.
Redline Communications Group has a market capitalisation of US$8.6m and burnt through US$1.5m last year, which is 17% of the company's 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.
How Risky Is Redline Communications Group's Cash Burn Situation?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Redline Communications Group's cash runway was relatively promising. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. On another note, Redline Communications Group has 3 warning signs (and 2 which make us uncomfortable) 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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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. Thank you for reading.
