Just because a business does not make any money, does not mean that the stock will go down. 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.
So should GSI Technology (NASDAQ:GSIT) shareholders 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. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for GSI Technology
When Might GSI Technology Run Out Of Money?
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 GSI Technology last reported its balance sheet in March 2020, it had zero debt and cash worth US$67m. Looking at the last year, the company burnt through US$5.0m. That means it had a cash runway of very many years as of March 2020. 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. Depicted below, you can see how its cash holdings have changed over time.
Is GSI Technology’s Revenue Growing?
We’re hesitant to extrapolate on the recent trend to assess its cash burn, because GSI Technology 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 16%. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Hard Would It Be For GSI Technology To Raise More Cash For Growth?
Since its revenue growth is moving in the wrong direction, GSI Technology shareholders may wish to think ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive growth. By comparing a company’s annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
GSI Technology has a market capitalisation of US$157m and burnt through US$5.0m last year, which is 3.2% of the company’s market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year’s growth by issuing some new shares to investors, or even by taking out a loan.
How Risky Is GSI Technology’s Cash Burn Situation?
It may already be apparent to you that we’re relatively comfortable with the way GSI Technology 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. While its falling revenue wasn’t great, the other factors mentioned in this article more than make up for weakness on that measure. 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. On another note, we conducted an in-depth investigation of the company, and identified 2 warning signs for GSI Technology (1 shouldn’t be ignored!) that you should be aware of before investing here.