There's no doubt that money can be made by owning shares of unprofitable businesses. 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, the natural question for Westell Technologies (NASDAQ:WSTL) 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
When Might Westell Technologies Run Out Of Money?
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 2019, Westell Technologies had US$24m in cash, and was debt-free. Importantly, its cash burn was US$769k over the trailing twelve months. That means it had a cash runway of very many years as of June 2019. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. You can see how its cash balance has changed over time in the image below.
Is Westell Technologies's Revenue Growing?
We're hesitant to extrapolate on the recent trend to assess its cash burn, because Westell Technologies 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 28% during the period. In reality, this article only makes a short study of the company's growth data. You can take a look at how Westell Technologies has developed its business over time by checking this visualization of its revenue and earnings history.
How Hard Would It Be For Westell Technologies To Raise More Cash For Growth?
Given its problematic fall in revenue, Westell Technologies shareholders should consider how the company could fund its growth, if it turns out it needs more cash. 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).
Westell Technologies's cash burn of US$769k is about 3.4% of its US$23m market capitalisation. 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.
Is Westell Technologies's Cash Burn A Worry?
It may already be apparent to you that we're relatively comfortable with the way Westell Technologies is burning through its cash. 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. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Westell Technologies CEO is paid..
If you would prefer to check out another company with better fundamentals, then do not miss this freelist of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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