We're A Little Worried About Zutec Holding's (STO:ZUTEC) Cash Burn Rate
We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should Zutec Holding (STO:ZUTEC) 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 Zutec Holding
When Might Zutec Holding Run Out Of Money?
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. As at December 2019, Zutec Holding had cash of kr6.2m and no debt. In the last year, its cash burn was kr25m. That means it had a cash runway of around 3 months as of December 2019. Notably, one analyst forecasts that Zutec Holding will break even (at a free cash flow level) in about 3 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. You can see how its cash balance has changed over time in the image below.
How Well Is Zutec Holding Growing?
At first glance it's a bit worrying to see that Zutec Holding actually boosted its cash burn by 27%, year on year. Also concerning, operating revenue was actually down by 9.8% in that time. Considering both these metrics, we're a little concerned about how the company is developing. 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.
How Easily Can Zutec Holding Raise Cash?
Given its revenue and free cash flow are both moving in the wrong direction, shareholders may well be wondering how easily Zutec Holding could raise cash. 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 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).
Since it has a market capitalisation of kr12m, Zutec Holding's kr25m in cash burn equates to about 209% of its market value. Given just how high that expenditure is, relative to the company's market value, we think there's an elevated risk of funding distress, and we would be very nervous about holding the stock.
So, Should We Worry About Zutec Holding's Cash Burn?
There are no prizes for guessing that we think Zutec Holding's cash burn is a bit of a worry. Take, for example, its cash burn relative to its market cap, which suggests the company may have difficulty funding itself, in the future. While not as bad as its cash burn relative to its market cap, its falling revenue is also a concern, and considering everything mentioned above, we're struggling to find much to be optimistic about. Shareholders can take heart from the fact that at least one analyst is forecasting it will reach breakeven. The measures we've considered in this article lead us to believe its cash burn is actually quite concerning, and its weak cash position seems likely to cost shareholders one way or another. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Zutec Holding CEO is paid..
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