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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
Given this risk, we thought we'd take a look at whether Patrys (ASX:PAB) shareholders should be worried about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Does Patrys Have A Long Cash Runway?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Patrys last reported its balance sheet in June 2019, it had zero debt and cash worth AU$6.5m. Importantly, its cash burn was AU$133k over the trailing twelve months. So it had a very long cash runway of many years from June 2019. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.
How Is Patrys's Cash Burn Changing Over Time?
In our view, Patrys doesn't yet produce significant amounts of operating revenue, since it reported just AU$844k in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. From a cash flow perspective, it's great to see the company's cash burn dropped by 94% over the last year. While that hardly points to growth potential, it does at least suggest the company is trying to survive. Admittedly, we're a bit cautious of Patrys due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Easily Can Patrys Raise Cash?
While we're comforted by the recent reduction evident from our analysis of Patrys's cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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.
Patrys has a market capitalisation of AU$23m and burnt through AU$133k last year, which is 0.6% of the company's 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.
Is Patrys's Cash Burn A Worry?
It may already be apparent to you that we're relatively comfortable with the way Patrys is burning through its cash. For example, we think its cash burn reduction suggests that the company is on a good path. But it's fair to say that its cash burn relative to its market cap was also very reassuring. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Patrys CEO is paid..
Of course Patrys 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.
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Thank you for reading.