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 essensys (LON:ESYS) shareholders is whether they should be concerned by its rate of 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. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
How Long Is essensys’ Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. In January 2022, essensys had UK£30m in cash, and was debt-free. In the last year, its cash burn was UK£6.2m. Therefore, from January 2022 it had 4.9 years of cash runway. There’s no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.
How Well Is essensys Growing?
It was quite stunning to see that essensys increased its cash burn by 686% over the last year. While operating revenue was up over the same period, the 2.9% gain gives us scant comfort. Considering these two factors together makes us nervous about the direction the company seems to be heading. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Hard Would It Be For essensys To Raise More Cash For Growth?
While essensys seems to be in a fairly good position, it’s still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and 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.
essensys has a market capitalisation of UK£36m and burnt through UK£6.2m last year, which is 17% of the company’s market value. As a result, we’d venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
So, Should We Worry About essensys’ Cash Burn?
On this analysis of essensys’ cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. While we’re the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about essensys’ situation. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for essensys (1 can’t be ignored!) that you should be aware of before investing here.
Of course essensys may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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