Yahoo Finance Companies Like Magnis Energy Technologies (ASX:MNS) Can Be Considered Quite Risky
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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should Magnis Energy Technologies (ASX:MNS) shareholders be worried about its 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Check out our latest analysis for Magnis Energy Technologies
Does Magnis Energy Technologies 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 Magnis Energy Technologies last reported its balance sheet in December 2019, it had zero debt and cash worth AU$433k. Looking at the last year, the company burnt through AU$4.8m. That means it had a cash runway of under two months as of December 2019. It's extremely surprising to us that the company has allowed its cash runway to get that short! Depicted below, you can see how its cash holdings have changed over time.
How Is Magnis Energy Technologies's Cash Burn Changing Over Time?
In our view, Magnis Energy Technologies doesn't yet produce significant amounts of operating revenue, since it reported just AU$176k 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. As it happens, the company's cash burn reduced by 11% over the last year, which suggests that management may be mindful of the risks of their depleting cash reserves. Magnis Energy Technologies makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Easily Can Magnis Energy Technologies Raise Cash?
While Magnis Energy Technologies is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. 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.
Since it has a market capitalisation of AU$32m, Magnis Energy Technologies's AU$4.8m in cash burn equates to about 15% 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 Magnis Energy Technologies's Cash Burn A Worry?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Magnis Energy Technologies's cash burn relative to its market cap was relatively promising. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. Taking a deeper dive, we've spotted 5 warning signs for Magnis Energy Technologies you should be aware of, and 2 of them make us uncomfortable.
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)
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.
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