Just because a business does not make any money, does not mean that the stock will go down. 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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So, the natural question for Maxtech Ventures (CSE:MVT) shareholders is whether they should be concerned by its rate of 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 Maxtech Ventures Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at October 2019, Maxtech Ventures had cash of CA$121k and no debt. Importantly, its cash burn was CA$124k over the trailing twelve months. That means it had a cash runway of around 12 months as of October 2019. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.
How Is Maxtech Ventures's Cash Burn Changing Over Time?
Maxtech Ventures didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. From a cash flow perspective, it's great to see the company's cash burn dropped by 91% over the last year. That might not be promising when it comes to business development, but it's good for the companies cash preservation. Maxtech Ventures makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Easily Can Maxtech Ventures Raise Cash?
There's no doubt Maxtech Ventures's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further 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. 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.
Maxtech Ventures's cash burn of CA$124k is about 2.1% of its CA$5.9m market capitalisation. 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 Maxtech Ventures's Cash Burn Situation?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Maxtech Ventures's cash burn reduction was relatively promising. 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. Notably, our data indicates that Maxtech Ventures insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
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)
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