Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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.
Given this risk, we thought we'd take a look at whether Cymat Technologies (CVE:CYM) shareholders should be worried about its 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's cash, relative to its cash burn.
When Might Cymat Technologies Run Out Of Money?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Cymat Technologies last reported its balance sheet in July 2019, it had zero debt and cash worth CA$461k. Looking at the last year, the company burnt through CA$621k. That means it had a cash runway of around 9 months as of July 2019. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Cymat Technologies Growing?
Cymat Technologies reduced its cash burn by 5.1% during the last year, which is points to some degree of discipline. Having said that, the flat operating revenue was a bit mundane. Considering both these factors, we're not particularly excited by its growth profile. In reality, this article only makes a short study of the company's growth data. You can take a look at how Cymat Technologies has developed its business over time by checking this visualization of its revenue and earnings history.
Can Cymat Technologies Raise More Cash Easily?
Since Cymat Technologies revenue has been falling, the market will likely be considering how it can raise more cash if need be. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to 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.
Cymat Technologies has a market capitalisation of CA$12m and burnt through CA$621k last year, which is 5.1% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
So, Should We Worry About Cymat Technologies's Cash Burn?
On this analysis of Cymat Technologies's cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway has us a bit worried. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. When you don't have traditional metrics like earnings per share and free cash flow to value a company, many are extra motivated to consider qualitative factors such as whether insiders are buying or selling shares. Please Note: Cymat Technologies insiders have been trading shares, according to our data. Click here to check whether insiders have been buying or selling.
Of course Cymat Technologies 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.
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.
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