Just because a business does not make any money, does not mean that the stock will go down. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So should Tyro Payments (ASX:TYR) 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's cash, relative to its cash burn.
How Long Is Tyro Payments's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2019, Tyro Payments had AU$133m in cash, and was debt-free. Importantly, its cash burn was AU$23m over the trailing twelve months. That means it had a cash runway of about 5.9 years as of December 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.
How Well Is Tyro Payments Growing?
At first glance it's a bit worrying to see that Tyro Payments actually boosted its cash burn by 36%, year on year. The revenue growth of 14% gives a ray of hope, at the very least. Considering both these factors, we're not particularly excited by its growth profile. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Tyro Payments is building its business over time.
Can Tyro Payments Raise More Cash Easily?
While Tyro Payments 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. 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. 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.
Tyro Payments's cash burn of AU$23m is about 1.6% of its AU$1.5b market capitalisation. 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 Tyro Payments's Cash Burn?
As you can probably tell by now, we're not too worried about Tyro Payments's cash burn. For example, we think its cash runway suggests that the company is on a good path. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. On another note, Tyro Payments has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.
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.
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