Yahoo Finance We're Hopeful That ReadCloud (ASX:RCL) Will Use Its Cash Wisely
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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So, the natural question for ReadCloud (ASX:RCL) shareholders is whether they should be concerned by its rate of 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
View our latest analysis for ReadCloud
How Long Is ReadCloud's Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When ReadCloud last reported its balance sheet in June 2019, it had zero debt and cash worth AU$3.1m. Looking at the last year, the company burnt through AU$1.1m. Therefore, from June 2019 it had 2.7 years of cash runway. That's decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.
How Well Is ReadCloud Growing?
At first glance it's a bit worrying to see that ReadCloud actually boosted its cash burn by 19%, year on year. Given that its operating revenue increased 146% in that time, it seems the company has reason to think its expenditure is working well to drive growth. If revenue is maintained once spending on growth decreases, that could well pay off! We think it is growing rather well, upon reflection. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how ReadCloud is growing revenue over time by checking this visualization of past revenue growth.
Can ReadCloud Raise More Cash Easily?
While ReadCloud 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash to drive growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
ReadCloud's cash burn of AU$1.1m is about 3.3% of its AU$34m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
So, Should We Worry About ReadCloud's Cash Burn?
As you can probably tell by now, we're not too worried about ReadCloud's cash burn. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. Looking at all the measures in this article, together, we're not worried about its rate of cash burn, which seems to be under control. For us, it's always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the ReadCloud CEO receives in total remuneration.
Of course ReadCloud 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.
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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. Thank you for reading.
