We can readily understand why investors are attracted to unprofitable companies. 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 Hazer Group (ASX:HZR) shareholders be worried 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. Let's start with an examination of the business's cash, relative to its cash burn.

See our latest analysis for Hazer Group

How Long Is Hazer Group's Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at June 2019, Hazer Group had cash of AU$6.0m and no debt. Importantly, its cash burn was AU$2.6m over the trailing twelve months. So it had a cash runway of about 2.3 years from June 2019. That's decent, giving the company a couple years to develop its business. Depicted below, you can see how its cash holdings have changed over time.

How Is Hazer Group's Cash Burn Changing Over Time?

Although Hazer Group had revenue of AU$1.6m in the last twelve months, its operating revenue was only AU$1.6m in that time period. We don't think that's enough operating revenue for us to understand too much from revenue growth rates, since the company is growing off a low base. So we'll focus on the cash burn, today. Even though it doesn't get us excited, the 46% reduction in cash burn year on year does suggest the company can continue operating for quite some time. In reality, this article only makes a short study of the company's growth data. You can take a look at how Hazer Group is growing revenue over time by checking this visualization of past revenue growth.

Can Hazer Group Raise More Cash Easily?

While Hazer Group is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash to drive 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.

Since it has a market capitalisation of AU$44m, Hazer Group's AU$2.6m in cash burn equates to about 5.9% of its market value. 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.

How Risky Is Hazer Group's Cash Burn Situation?

As you can probably tell by now, we're not too worried about Hazer Group's cash burn. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. But it's fair to say that its cash burn reduction was also very reassuring. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Notably, our data indicates that Hazer Group insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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.