Yahoo Finance We Think Zoomd Technologies (CVE:ZOMD) Can Afford To Drive Business Growth
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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So, the natural question for Zoomd Technologies (CVE:ZOMD) 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
View our latest analysis for Zoomd Technologies
How Long Is Zoomd Technologies'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. Zoomd Technologies has such a small amount of debt that we'll set it aside, and focus on the US$4.3m in cash it held at March 2020. In the last year, its cash burn was US$2.0m. So it had a cash runway of about 2.2 years from March 2020. Arguably, that's a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.
Is Zoomd Technologies's Revenue Growing?
Given that Zoomd Technologies actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 12%. In reality, this article only makes a short study of the company's growth data. You can take a look at how Zoomd Technologies has developed its business over time by checking this visualization of its revenue and earnings history.
How Easily Can Zoomd Technologies Raise Cash?
Given its problematic fall in revenue, Zoomd Technologies shareholders should consider how the company could fund its growth, if it turns out it needs more cash. 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.
Zoomd Technologies has a market capitalisation of US$29m and burnt through US$2.0m last year, which is 6.8% 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.
So, Should We Worry About Zoomd Technologies's Cash Burn?
On this analysis of Zoomd Technologies's cash burn, we think its cash burn relative to its market cap was reassuring, while its falling revenue has us a bit worried. 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 3 warning signs for Zoomd Technologies (1 is concerning!) that you should be aware of before investing here.
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.
Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.
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. Thank you for reading.
