Here's Why We're A Bit Worried About Anacle Systems's (HKG:8353) Cash Burn Situation
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, 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So, the natural question for Anacle Systems (HKG:8353) shareholders is whether they should be concerned by its rate of 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.
View our latest analysis for Anacle Systems
How Long Is Anacle Systems's Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at November 2019, Anacle Systems had cash of S$1.5m and no debt. Importantly, its cash burn was S$4.5m over the trailing twelve months. Therefore, from November 2019 it had roughly 4 months of cash runway. That's a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. The image below shows how its cash balance has been changing over the last few years.
How Well Is Anacle Systems Growing?
It was quite stunning to see that Anacle Systems increased its cash burn by 300% over the last year. While that's concerning on it's own, the fact that operating revenue was actually down 16% over the same period makes us positively tremulous. Considering these two factors together makes us nervous about the direction the company seems to be heading. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
Can Anacle Systems Raise More Cash Easily?
Given its revenue and free cash flow are both moving in the wrong direction, shareholders may well be wondering how easily Anacle Systems could raise cash. Companies can raise capital through either debt or equity. 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).
Anacle Systems has a market capitalisation of S$18m and burnt through S$4.5m last year, which is 25% of the company's market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
How Risky Is Anacle Systems's Cash Burn Situation?
There are no prizes for guessing that we think Anacle Systems's cash burn is a bit of a worry. Take, for example, its increasing cash burn, which suggests the company may have difficulty funding itself, in the future. While not as bad as its increasing cash burn, its cash burn relative to its market cap is also a concern, and considering everything mentioned above, we're struggling to find much to be optimistic about. Once we consider the metrics mentioned in this article together, we're left with very little confidence in the company's ability to manage its cash burn, and we think it will probably need more money. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that Anacle Systems insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
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)
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