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 Qt Group Oyj (HEL:QTCOM) 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Does Qt Group Oyj Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Qt Group Oyj last reported its balance sheet in June 2019, it had zero debt and cash worth €10m. Looking at the last year, the company burnt through €164k. That means it had a cash runway of very many years as of June 2019. Notably, however, analysts think that Qt Group Oyj 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.
How Well Is Qt Group Oyj Growing?
Given our focus on Qt Group Oyj's cash burn, we're delighted to see that it reduced its cash burn by a nifty 91%. And it could also show revenue growth of 14% in the same period. It seems to be growing nicely. 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 Easily Can Qt Group Oyj Raise Cash?
There's no doubt Qt Group Oyj seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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).
Qt Group Oyj has a market capitalisation of €338m and burnt through €164k last year, which is 0.05% 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.
How Risky Is Qt Group Oyj's Cash Burn Situation?
It may already be apparent to you that we're relatively comfortable with the way Qt Group Oyj is burning through its cash. For example, we think its cash burn reduction suggests that the company is on a good path. And even though its revenue growth wasn't quite as impressive, it was still a positive. 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. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. We think it's very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what Qt Group Oyj's CEO gets paid each year.
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)
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