There’s no doubt that money can be made by owning shares of unprofitable businesses. 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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
Given this risk, we thought we’d take a look at whether MGM Wireless (ASX:MWR) shareholders should 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. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for MGM Wireless
Does MGM Wireless Have A Long Cash Runway?
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 June 2020, MGM Wireless had cash of AU$3.2m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through AU$2.2m. So it had a cash runway of approximately 17 months from June 2020. While that cash runway isn’t too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.
How Well Is MGM Wireless Growing?
We reckon the fact that MGM Wireless managed to shrink its cash burn by 20% over the last year is rather encouraging. And considering that its operating revenue gained 47% during that period, that’s great to see. It seems to be growing nicely. Of course, we’ve only taken a quick look at the stock’s growth metrics, here. You can take a look at how MGM Wireless is growing revenue over time by checking this visualization of past revenue growth.
How Hard Would It Be For MGM Wireless To Raise More Cash For Growth?
MGM Wireless 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. We can compare a company’s cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year’s operations.
MGM Wireless has a market capitalisation of AU$27m and burnt through AU$2.2m last year, which is 8.1% of the company’s market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year’s growth by issuing some new shares to investors, or even by taking out a loan.
Is MGM Wireless’ Cash Burn A Worry?
The good news is that in our view MGM Wireless’ cash burn situation gives shareholders real reason for optimism. One the one hand we have its solid cash burn relative to its market cap, while on the other it can also boast very strong revenue growth. Considering all the factors discussed in this article, we’re not overly concerned about the company’s cash burn, although we do think shareholders should keep an eye on how it develops. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for MGM Wireless (2 are a bit unpleasant!) that you should be aware of before investing here.
Of course MGM Wireless may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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