Yahoo Finance Here's Why We're Not Too Worried About Terragen Holdings' (ASX:TGH) Cash Burn Situation
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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Terragen Holdings (ASX:TGH) 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). Let's start with an examination of the business' cash, relative to its cash burn.
Check out our latest analysis for Terragen Holdings
When Might Terragen Holdings 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. In June 2021, Terragen Holdings had AU$12m in cash, and was debt-free. Looking at the last year, the company burnt through AU$4.9m. That means it had a cash runway of about 2.4 years as of June 2021. Arguably, that's a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Terragen Holdings Growing?
Some investors might find it troubling that Terragen Holdings is actually increasing its cash burn, which is up 14% in the last year. But looking on the bright side, its revenue gained by 86%, lending some credence to the growth narrative. Of course, with spend going up shareholders will want to see fast growth continue. It seems to be growing nicely. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Terragen Holdings is growing revenue over time by checking this visualization of past revenue growth.
Can Terragen Holdings Raise More Cash Easily?
While Terragen Holdings seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. 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. 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.
Terragen Holdings has a market capitalisation of AU$50m and burnt through AU$4.9m last year, which is 9.8% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
So, Should We Worry About Terragen Holdings' Cash Burn?
It may already be apparent to you that we're relatively comfortable with the way Terragen Holdings is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. On another note, Terragen Holdings has 5 warning signs (and 1 which is a bit unpleasant) we think you should know about.
Of course Terragen Holdings 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.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
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