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Here's Why We're Watching Applyflow's (ASX:AFW) Cash Burn Situation

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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 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 Applyflow (ASX:AFW) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for Applyflow

How Long Is Applyflow's Cash Runway?

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 December 2020, Applyflow had AU$3.3m in cash, and was debt-free. Importantly, its cash burn was AU$3.1m over the trailing twelve months. So it had a cash runway of approximately 13 months from December 2020. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
debt-equity-history-analysis

How Is Applyflow's Cash Burn Changing Over Time?

In our view, Applyflow doesn't yet produce significant amounts of operating revenue, since it reported just AU$1.6m 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. In fact, it ramped its spending strongly over the last year, increasing cash burn by 122%. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. In reality, this article only makes a short study of the company's growth data. This graph of historic revenue growth shows how Applyflow is building its business over time.

How Hard Would It Be For Applyflow To Raise More Cash For Growth?

Given its cash burn trajectory, Applyflow shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. 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.

Applyflow has a market capitalisation of AU$29m and burnt through AU$3.1m last year, which is 11% of the company's 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.

How Risky Is Applyflow's Cash Burn Situation?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Applyflow's cash burn relative to its market cap was relatively promising. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. Separately, we looked at different risks affecting the company and spotted 5 warning signs for Applyflow (of which 2 are significant!) you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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