Yahoo Finance Is MSM Corporation International (ASX:MSM) In A Good Position To Invest In Growth?
We can readily understand why investors are attracted to unprofitable companies. 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 MSM Corporation International (ASX:MSM) shareholders 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'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
See our latest analysis for MSM Corporation International
Does MSM Corporation International Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2019, MSM Corporation International had AU$205k in cash, and was debt-free. In the last year, its cash burn was AU$877k. Therefore, from December 2019 it had roughly 3 months of cash runway. That's a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. Depicted below, you can see how its cash holdings have changed over time.
How Is MSM Corporation International's Cash Burn Changing Over Time?
Whilst it's great to see that MSM Corporation International has already begun generating revenue from operations, last year it only produced AU$5.0, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. The 82% reduction in its cash burn over the last twelve months could be interpreted as a sign that management are worried about running out of cash. MSM Corporation International makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Easily Can MSM Corporation International Raise Cash?
There's no doubt MSM Corporation International's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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.
MSM Corporation International's cash burn of AU$877k is about 15% of its AU$5.9m market capitalisation. 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 MSM Corporation International's Cash Burn Situation?
On this analysis of MSM Corporation International's cash burn, we think its cash burn reduction was reassuring, while its cash runway has us a bit worried. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. On another note, we conducted an in-depth investigation of the company, and identified 6 warning signs for MSM Corporation International (3 shouldn't be ignored!) that you should be aware of before investing here.
Of course MSM Corporation International 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.
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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