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We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Prophecy International Holdings (ASX:PRO) 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
How Long Is Prophecy International Holdings' Cash Runway?
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. In June 2021, Prophecy International Holdings had AU$3.2m in cash, and was debt-free. Looking at the last year, the company burnt through AU$409k. Therefore, from June 2021 it had 7.9 years of cash runway. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.
Is Prophecy International Holdings' Revenue Growing?
We're hesitant to extrapolate on the recent trend to assess its cash burn, because Prophecy International Holdings actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Unfortunately, the last year has been a disappointment, with operating revenue dropping 5.5% during the period. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Prophecy International Holdings is building its business over time.
Can Prophecy International Holdings Raise More Cash Easily?
Since its revenue growth is moving in the wrong direction, Prophecy International Holdings shareholders may wish to think ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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.
Since it has a market capitalisation of AU$34m, Prophecy International Holdings' AU$409k in cash burn equates to about 1.2% of its 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.
So, Should We Worry About Prophecy International Holdings' Cash Burn?
As you can probably tell by now, we're not too worried about Prophecy International Holdings' cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While its falling revenue wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash. Taking a deeper dive, we've spotted 2 warning signs for Prophecy International Holdings you should be aware of, and 1 of them can't be ignored.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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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