There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for dynaCERT (TSE:DYA) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.
When Might dynaCERT Run Out Of Money?
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. As at June 2020, dynaCERT had cash of CA$19m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through CA$11m. That means it had a cash runway of around 21 months as of June 2020. Importantly, though, the one analyst we see covering the stock thinks that dynaCERT will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. Depicted below, you can see how its cash holdings have changed over time.
How Is dynaCERT's Cash Burn Changing Over Time?
In our view, dynaCERT doesn't yet produce significant amounts of operating revenue, since it reported just CA$1.3m in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Over the last year its cash burn actually increased by 24%, which suggests that management are increasing investment in future growth, but not too quickly. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Hard Would It Be For dynaCERT To Raise More Cash For Growth?
While dynaCERT does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise 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. Many companies end up issuing new shares to fund future growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Since it has a market capitalisation of CA$199m, dynaCERT's CA$11m in cash burn equates to about 5.5% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
So, Should We Worry About dynaCERT's Cash Burn?
As you can probably tell by now, we're not too worried about dynaCERT's cash burn. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. There's no doubt that shareholders can take a lot of heart from the fact that at least one analyst is forecasting it will reach breakeven before too long. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. On another note, dynaCERT has 5 warning signs (and 1 which is a bit unpleasant) we think you should know about.
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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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