There’s no doubt that money can be made by owning shares of unprofitable businesses. 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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given this risk, we thought we’d take a look at whether Wavefront Technology Solutions (CVE:WEE) shareholders should 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’. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
Check out our latest analysis for Wavefront Technology Solutions
When Might Wavefront Technology Solutions 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 February 2020, Wavefront Technology Solutions had cash of CA$1.8m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through CA$872k. Therefore, from February 2020 it had 2.1 years of cash runway. Arguably, that’s a prudent and sensible length of runway to have. The image below shows how its cash balance has been changing over the last few years.
Is Wavefront Technology Solutions’s Revenue Growing?
We’re hesitant to extrapolate on the recent trend to assess its cash burn, because Wavefront Technology Solutions actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Regrettably, the company’s operating revenue moved in the wrong direction over the last twelve months, declining by 18%. In reality, this article only makes a short study of the company’s growth data. This graph of historic earnings and revenue shows how Wavefront Technology Solutions is building its business over time.
How Easily Can Wavefront Technology Solutions Raise Cash?
Given its problematic fall in revenue, Wavefront Technology Solutions shareholders should consider how the company could fund its growth, if it turns out it needs more cash. Companies can raise capital through either debt or equity. 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.
Since it has a market capitalisation of CA$4.4m, Wavefront Technology Solutions’s CA$872k in cash burn equates to about 20% of its market value. Given that situation, it’s fair to say the company wouldn’t have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
Is Wavefront Technology Solutions’s Cash Burn A Worry?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Wavefront Technology Solutions’s cash runway was relatively promising. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we’re not too worried about its rate of cash burn. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Wavefront Technology Solutions (2 make us uncomfortable!) that you should be aware of before investing here.
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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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. Thank you for reading.