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Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should Nuix (ASX:NXL) 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
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How Long Is Nuix's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Nuix last reported its balance sheet in December 2022, it had zero debt and cash worth AU$37m. Looking at the last year, the company burnt through AU$13m. That means it had a cash runway of about 2.9 years as of December 2022. Arguably, that's a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.
How Well Is Nuix Growing?
Happily, Nuix is travelling in the right direction when it comes to its cash burn, which is down 60% over the last year. Unfortunately, however, operating revenue dropped 11% 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. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
Can Nuix Raise More Cash Easily?
There's no doubt Nuix seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Nuix's cash burn of AU$13m is about 3.1% of its AU$421m 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.