RAS Technology Holdings (ASX:RTH) 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should RAS Technology Holdings (ASX:RTH) shareholders 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' cash, relative to its cash burn.
View our latest analysis for RAS Technology Holdings
How Long Is RAS Technology Holdings' Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When RAS Technology Holdings last reported its balance sheet in June 2023, it had zero debt and cash worth AU$8.7m. Importantly, its cash burn was AU$1.9m over the trailing twelve months. That means it had a cash runway of about 4.5 years as of June 2023. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.
How Well Is RAS Technology Holdings Growing?
It was fairly positive to see that RAS Technology Holdings reduced its cash burn by 49% during the last year. On top of that, operating revenue was up 41%, making for a heartening combination It seems to be growing nicely. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how RAS Technology Holdings is growing revenue over time by checking this visualization of past revenue growth.
Can RAS Technology Holdings Raise More Cash Easily?
While RAS Technology Holdings seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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).
Since it has a market capitalisation of AU$41m, RAS Technology Holdings' AU$1.9m in cash burn equates to about 4.7% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
Is RAS Technology Holdings' Cash Burn A Worry?
It may already be apparent to you that we're relatively comfortable with the way RAS Technology Holdings is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. But it's fair to say that its cash burn reduction was also very reassuring. 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. Taking a deeper dive, we've spotted 3 warning signs for RAS Technology Holdings you should be aware of, and 1 of them is significant.
Of course RAS Technology Holdings 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.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
