Yahoo Finance Companies Like PCI-PAL (LON:PCIP) Can Afford To Invest In Growth
We can readily understand why investors are attracted to unprofitable companies. 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.
Given this risk, we thought we'd take a look at whether PCI-PAL (LON:PCIP) shareholders should 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'.
See our latest analysis for PCI-PAL
How Long Is PCI-PAL's Cash Runway?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. In December 2021, PCI-PAL had UK£5.5m in cash, and was debt-free. Importantly, its cash burn was UK£1.8m over the trailing twelve months. So it had a cash runway of about 3.0 years from December 2021. Notably, however, the one analyst we see covering the stock thinks that PCI-PAL will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.
How Well Is PCI-PAL Growing?
We reckon the fact that PCI-PAL managed to shrink its cash burn by 25% over the last year is rather encouraging. And arguably the operating revenue growth of 74% was even more impressive. It seems to be growing nicely. 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.
How Easily Can PCI-PAL Raise Cash?
While PCI-PAL seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Companies can raise capital through either debt or equity. 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.
PCI-PAL has a market capitalisation of UK£43m and burnt through UK£1.8m last year, which is 4.2% of the company's market value. 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.
Is PCI-PAL's Cash Burn A Worry?
As you can probably tell by now, we're not too worried about PCI-PAL's cash burn. For example, we think its revenue growth suggests that the company is on a good path. And even though its cash burn reduction wasn't quite as impressive, it was still a positive. One real positive is that at least one analyst is forecasting that the company will reach breakeven. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for PCI-PAL that investors should know when investing in the stock.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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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.
