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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 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 Terragen Holdings (ASX:TGH) shareholders be worried about its 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). Let's start with an examination of the business' cash, relative to its cash burn.
View our latest analysis for Terragen Holdings
Does Terragen Holdings Have A Long 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 Terragen Holdings last reported its balance sheet in December 2021, it had zero debt and cash worth AU$9.1m. In the last year, its cash burn was AU$5.3m. That means it had a cash runway of around 21 months as of December 2021. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.
How Well Is Terragen Holdings Growing?
Some investors might find it troubling that Terragen Holdings is actually increasing its cash burn, which is up 12% in the last year. The revenue growth of 9.7% gives a ray of hope, at the very least. Considering both these factors, we're not particularly excited by its growth profile. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Terragen Holdings is building its business over time.
How Easily Can Terragen Holdings Raise Cash?
Terragen Holdings seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. 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 and drive 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.