Even when a company loses money, it is possible for shareholders to make money if they buy a good company at the right price. For example, although software-as-a-service company Salesforce.com lost money for years as it grew recurring revenue, if you had held stock since 2005, you would have done very well. But the harsh reality is that many, many loss-making companies burn all their money and go bankrupt.
Given this risk, we thought we would examine whether AcouSort (STO:ACOU) shareholders should be concerned about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Let’s start with a review of the company’s cash flow, relative to its cash burn.
Check out our latest review for AcouSort
Does AcouSort have a long cash trail?
A cash trail is defined as the length of time it would take a business to run out of cash if it continued to spend at its current rate of cash burn. As of March 2022, AcouSort had 29 million kr in cash and had no debt. Last year, its cash consumption was 12 million kr. Therefore, as of March 2022, it had 2.4 years of cash trail. Arguably, this is a prudent and reasonable runway length to have. The image below shows how his cash balance has changed over the past few years.
How is AcouSort’s cash burn changing over time?
While it’s great to see that AcouSort has already started generating revenue from operations, last year it only generated 3.1 million kr so we don’t believe it is generating revenue significant revenue at this stage. Therefore, for the purposes of this analysis, we will focus on how cash burn is tracked. Over the past year, its cash burn has actually increased by 24%, suggesting that management is increasing its investments in future growth, but not too quickly. This isn’t necessarily a bad thing, but investors should be aware that it will shorten the cash trail. Granted, we’re a little leery of AcouSort due to its lack of meaningful operating revenue. We therefore generally prefer stocks from this list of stocks whose analysts predict growth.
Can AcouSort raise more money easily?
Although AcouSort has a strong cash trail, its cash burn trajectory may cause some shareholders to think ahead to when the company might need to raise more cash. Issuing new shares or going into debt are the most common ways for a listed company to raise more funds for its business. One of the main advantages of publicly traded companies is that they can sell shares to investors to raise funds and finance their growth. We can compare a company’s cash burn to its market capitalization to get an idea of how many new shares a company would need to issue to fund a year’s operations.
AcouSort’s cash burn of kr 12 million represents approximately 4.9% of its market capitalization of kr 244 million. This is a small proportion, so we think the company would be able to raise more cash to fund growth, with a bit of dilution, or even just borrow money.
So, should we be worried about AcouSort’s cash burn?
As you can probably tell by now, we’re not too worried about AcouSort’s cash burn. For example, we think its cash burn relative to its market capitalization suggests the company is on the right track. While its growing cash burn was not significant, the other factors mentioned in this article more than offset the weakness in this metric. Based on the factors mentioned in this article, we think its cash burn situation deserves some attention from shareholders, but we don’t think they should be concerned. Separately, we looked at different risks affecting the business and identified 5 warning signs for AcouSort (including 2 potentially serious!) that you should be aware of.
Sure, you might find a fantastic investment by looking elsewhere. So take a look at this free list of interesting companies, and this list of growth stocks (according to analyst forecasts)
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.