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Just because a business does not make any money, does not mean that the stock will go down. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should AML3D (ASX:AL3) 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'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
See our latest analysis for AML3D
How Long Is AML3D'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 AML3D last reported its balance sheet in June 2020, it had zero debt and cash worth AU$8.2m. Importantly, its cash burn was AU$3.0m over the trailing twelve months. Therefore, from June 2020 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 Is AML3D's Cash Burn Changing Over Time?
In our view, AML3D doesn't yet produce significant amounts of operating revenue, since it reported just AU$289k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Remarkably, it actually increased its cash burn by 234% in the last year. Given that sharp increase in spending, the company's cash runway will shrink rapidly as it depletes its cash reserves. Admittedly, we're a bit cautious of AML3D due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can AML3D Raise More Cash Easily?
Given its cash burn trajectory, AML3D 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. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.
AML3D's cash burn of AU$3.0m is about 6.4% of its AU$47m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.