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We're Hopeful That Delecta (ASX:DLC) Will Use Its Cash Wisely

Simply Wall St

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 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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for Delecta (ASX:DLC) shareholders is whether they should be concerned by its rate of 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Delecta

Does Delecta 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. As at June 2019, Delecta had cash of AU$1.6m and no debt. Looking at the last year, the company burnt through AU$364k. So it had a cash runway of about 4.3 years from June 2019. There's no doubt that this is a reassuringly long runway. Depicted below, you can see how its cash holdings have changed over time.

ASX:DLC Historical Debt, January 6th 2020

How Well Is Delecta Growing?

Notably, Delecta actually ramped up its cash burn very hard and fast in the last year, by 168%, signifying heavy investment in the business. While that's concerning on it's own, the fact that operating revenue was actually down 3.6% over the same period makes us positively tremulous. Considering these two factors together makes us nervous about the direction the company seems to be heading. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Delecta has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Delecta Raise Cash?

Even though it seems like Delecta is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Delecta's cash burn of AU$364k is about 10% of its AU$3.5m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

How Risky Is Delecta's Cash Burn Situation?

On this analysis of Delecta's cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Delecta's situation. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that Delecta insiders have been trading shares in the company. Click here to find out if they have been buying or selling.

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)

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.