Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for Stratasys (NASDAQ:SSYS) shareholders is whether they should be concerned by its rate of 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.
When Might Stratasys 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. As at September 2019, Stratasys had cash of US$347m and no debt. Looking at the last year, the company burnt through US$12m. That means it had a cash runway of very many years as of September 2019. Notably, however, analysts think that Stratasys will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. Depicted below, you can see how its cash holdings have changed over time.
Is Stratasys's Revenue Growing?
We're hesitant to extrapolate on the recent trend to assess its cash burn, because Stratasys actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. As it happens, operating revenue has been pretty flat over the last year. 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 Stratasys Raise Cash?
Since its revenue growth is moving in the wrong direction, Stratasys shareholders may wish to think ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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).
Since it has a market capitalisation of US$1.2b, Stratasys's US$12m in cash burn equates to about 1.0% of its 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 Stratasys's Cash Burn Situation?
It may already be apparent to you that we're relatively comfortable with the way Stratasys is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. 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. 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 Stratasys'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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