We Think Dril-Quip (NYSE:DRQ) Can Easily Afford To Drive Business Growth
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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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
Given this risk, we thought we'd take a look at whether Dril-Quip (NYSE:DRQ) shareholders should 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. Let's start with an examination of the business' cash, relative to its cash burn.
View our latest analysis for Dril-Quip
Does Dril-Quip Have A Long Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In March 2020, Dril-Quip had US$343m in cash, and was debt-free. Importantly, its cash burn was US$20m over the trailing twelve months. That means it had a cash runway of very many years as of March 2020. Notably, however, analysts think that Dril-Quip will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.
Is Dril-Quip's Revenue Growing?
Given that Dril-Quip actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. Although it's hardly brilliant growth, it's good to see the company grew revenue by 9.7% in the last year. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
Can Dril-Quip Raise More Cash Easily?
Notwithstanding Dril-Quip's revenue growth, it is still important to consider how it could raise more money, if it needs to. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.
Since it has a market capitalisation of US$1.2b, Dril-Quip's US$20m in cash burn equates to about 1.7% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
So, Should We Worry About Dril-Quip's Cash Burn?
It may already be apparent to you that we're relatively comfortable with the way Dril-Quip 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. On this analysis its revenue growth was its weakest feature, but we are not concerned about it. It's clearly very positive to see that analysts are forecasting the company will break even fairly soon. 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. Notably, our data indicates that Dril-Quip insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
This article by Simply Wall St is general in nature. 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.
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