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We're Hopeful That DigitalX (ASX:DCC) Will Use Its Cash Wisely

We can readily understand why investors are attracted to unprofitable companies. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for DigitalX (ASX:DCC) 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). Let's start with an examination of the business's cash, relative to its cash burn.

See our latest analysis for DigitalX

When Might DigitalX 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 June 2019, DigitalX had cash of US$5.2m and no debt. Looking at the last year, the company burnt through US$2.6m. That means it had a cash runway of about 2.0 years as of June 2019. Arguably, that's a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.

ASX:DCC Historical Debt, December 9th 2019
ASX:DCC Historical Debt, December 9th 2019

How Hard Would It Be For DigitalX To Raise More Cash For Growth?

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 looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

DigitalX's cash burn of US$2.6m is about 19% of its AU$20m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

Is DigitalX's Cash Burn A Worry?

Given it's an early stage company, we don't have a lot of data with which to judge DigitalX's cash burn. Having said that, we can say that its cash runway was a real positive. To be frank most cash burning companies are relatively risky, but this one seems safer than most, in our view. Notably, our data indicates that DigitalX insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.

Of course DigitalX 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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