There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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, the natural question for Cuscapi Berhad (KLSE:CUSCAPI) 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 Cuscapi Berhad
When Might Cuscapi Berhad Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2022, Cuscapi Berhad had cash of RM1.8m and no debt. Importantly, its cash burn was RM1.9m over the trailing twelve months. That means it had a cash runway of around 11 months as of December 2022. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Cuscapi Berhad Growing?
Happily, Cuscapi Berhad is travelling in the right direction when it comes to its cash burn, which is down 67% over the last year. Unfortunately, however, operating revenue dropped 29% during the same time frame. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. 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 Cuscapi Berhad is building its business over time.
Can Cuscapi Berhad Raise More Cash Easily?
Cuscapi Berhad 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. 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. 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.
Cuscapi Berhad's cash burn of RM1.9m is about 0.9% of its RM203m market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.