Will 9R (Catalist:1Y1) Spend Its Cash Wisely?
Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So should 9R (Catalist:1Y1) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Check out our latest analysis for 9R
How Long Is 9R's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When 9R last reported its December 2023 balance sheet in April 2024, it had zero debt and cash worth S$5.2m. Importantly, its cash burn was S$6.0m over the trailing twelve months. So it had a cash runway of approximately 10 months from December 2023. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.
How Well Is 9R Growing?
At first glance it's a bit worrying to see that 9R actually boosted its cash burn by 29%, year on year. On a more positive note, the operating revenue improved by 121% over the period, offering an indication that the expenditure may well be worthwhile. If that revenue does keep flowing reliably, then the company could see a strong improvement in free cash flow simply by reducing growth expenditure. We think it is growing rather well, upon reflection. In reality, this article only makes a short study of the company's growth data. This graph of historic revenue growth shows how 9R is building its business over time.
Can 9R Raise More Cash Easily?
While 9R seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster 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 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.
9R's cash burn of S$6.0m is about 11% of its S$56m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
So, Should We Worry About 9R's Cash Burn?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought 9R's revenue growth was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about 9R's situation. Separately, we looked at different risks affecting the company and spotted 5 warning signs for 9R (of which 1 is potentially serious!) you should know about.
Of course 9R 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 with high insider ownership.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com