Dril-Quip (NYSE:DRQ) Is In A Strong Position To Grow Its Business
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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So should Dril-Quip (NYSE:DRQ) shareholders be worried about its 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.
Check out our latest analysis for Dril-Quip
When Might Dril-Quip Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Dril-Quip last reported its balance sheet in September 2020, it had zero debt and cash worth US$359m. Looking at the last year, the company burnt through US$9.4m. So it had a very long cash runway of many years from September 2020. Notably, however, analysts think that Dril-Quip will break even (at a free cash flow level) before then. If that happens, then the length of its cash runway, today, would become a moot point. You can see how its cash balance has changed over time in the image below.
Is Dril-Quip's Revenue Growing?
We're hesitant to extrapolate on the recent trend to assess its cash burn, because Dril-Quip actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 4.3%. Clearly, however, the crucial factor is whether the company will grow its business going forward. 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 Dril-Quip Raise Cash?
Given its problematic fall in revenue, Dril-Quip shareholders should consider how the company could fund its growth, if it turns out it needs more cash. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Dril-Quip's cash burn of US$9.4m is about 0.8% of its US$1.2b market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
Is Dril-Quip's Cash Burn A Worry?
As you can probably tell by now, we're not too worried about Dril-Quip's cash burn. For example, we think its cash runway suggests that the company is on a good path. While its falling revenue wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. Taking an in-depth view of risks, we've identified 1 warning sign for Dril-Quip that you should be aware of before investing.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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. 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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