There is no doubt that it is possible to make money by owning shares of unprofitable companies. For example, although software-as-a-service company Salesforce.com lost money for years as it grew recurring revenue, if you had held stock since 2005, you would have done very well. However, only a fool would ignore the risk of a loss-making company burning through its cash too quickly.
Given this risk, we thought we would examine whether Nanoform Finland Oyj (HEL:NANOFH) shareholders should be concerned about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we will determine its cash trail by comparing its cash consumption with its cash reserves.
Our analysis indicates that NANOFH is potentially overrated!
Does Nanoform Finland Oyj have a long cash trail?
A cash trail is defined as the length of time it would take a business to run out of cash if it continued to spend at its current rate of cash consumption. When Nanoform Finland Oyj last published its balance sheet in June 2022, it had no debt and cash worth €83 million. Above all, its cash consumption was 27 million euros over the last twelve months. This means it had a cash trail of around 3.0 years in June 2022. There is no doubt that this is a long and reassuring trail. However, if we extrapolate the company’s recent cash burn trend, then it would have a longer cash flow. Below you can see how its liquidity has changed over time.
How is Nanoform Finland Oyj growing?
Some investors might find it troubling that Nanoform Finland Oyj is actually increasing its cash consumption, which has increased by 40% over the past year. On a more positive note, operating revenue improved by 138% over the period, indicating that the expense may well be worth it. If that revenue continues to flow reliably, the company could see a big improvement in free cash flow simply by reducing growth expenses. Overall, we would say the company is improving over time. Obviously, however, the crucial factor is whether the company will expand its business in the future. For this reason, it makes a lot of sense to take a look at our analysts’ forecasts for the company.
Can Nanoform Finland Oyj raise more money easily?
No doubt Nanoform Finland Oyj seems to be in a pretty good position to manage its cash burn, but even if it’s only hypothetical, it’s still worth considering how easily it could raise more cash. money to fund growth. Companies can raise capital either through debt or equity. One of the main advantages of publicly traded companies is that they can sell shares to investors to raise funds and finance their growth. We can compare a company’s cash burn to its market capitalization to get an idea of how many new shares a company would need to issue to fund a year’s operations.
Nanoform Finland Oyj’s cash burn of €27 million represents approximately 12% of its market capitalization of €224 million. Given this situation, it’s fair to say that the company wouldn’t have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
So should we be worried about Nanoform Finland Oyj’s cash burn?
As you can probably tell by now, we’re not too worried about Nanoform Finland Oyj’s cash burn. For example, we think its revenue growth suggests the company is on the right track. While its growing cash burn gives us reason to pause, the other metrics we’ve discussed in this article paint an overall positive picture. Given all the factors discussed in this article, we’re not overly concerned about the company’s cash burn, although we think shareholders should keep an eye on how it’s doing. By examining the risks in depth, we have identified 3 warning signs for Nanoform Finland Oyj which you should be aware of before investing.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.