There's no doubt that money can be made by owning shares of unprofitable businesses. 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 should Pixelworks (NASDAQ:PXLW) shareholders be worried about its 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
When Might Pixelworks Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2019, Pixelworks had US$22m in cash, and was debt-free. Importantly, its cash burn was US$1.1m over the trailing twelve months. So it had a very long cash runway of many years from September 2019. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Pixelworks Growing?
One thing for shareholders to keep front in mind is that Pixelworks increased its cash burn by 223% in the last twelve months. That's not ideal, but we're made even more nervous given that operating revenue was flat over the same period. Considering these two factors together makes us nervous about the direction the company seems to be heading. 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 Easily Can Pixelworks Raise Cash?
Even though it seems like Pixelworks is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash to drive 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.
Pixelworks has a market capitalisation of US$123m and burnt through US$1.1m last year, which is 0.9% of the company's market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.
Is Pixelworks's Cash Burn A Worry?
On this analysis of Pixelworks's cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. 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. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that Pixelworks insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
Of course Pixelworks 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.