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We can readily understand why investors are attracted to unprofitable companies. 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?
So, the natural question for Etihad Atheeb Telecommunication (TADAWUL:7040) 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. We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
See our latest analysis for Etihad Atheeb Telecommunication
When Might Etihad Atheeb Telecommunication Run Out Of Money?
A company’s cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Etihad Atheeb Telecommunication last reported its balance sheet in June 2021, it had zero debt and cash worth ر.س77m. Looking at the last year, the company burnt through ر.س21m. That means it had a cash runway of about 3.6 years as of June 2021. A runway of this length affords the company the time and space it needs to develop the business. You can see how its cash balance has changed over time in the image below.
Is Etihad Atheeb Telecommunication’s Revenue Growing?
Given that Etihad Atheeb Telecommunication 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 10.0%. Of course, we’ve only taken a quick look at the stock’s growth metrics, here. You can take a look at how Etihad Atheeb Telecommunication has developed its business over time by checking this visualization of its revenue and earnings history.
How Hard Would It Be For Etihad Atheeb Telecommunication To Raise More Cash For Growth?
Since its revenue growth is moving in the wrong direction, Etihad Atheeb Telecommunication shareholders may wish to think ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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).
Etihad Atheeb Telecommunication’s cash burn of ر.س21m is about 2.7% of its ر.س778m market capitalisation. So it could almost certainly just borrow a little to fund another year’s growth, or else easily raise the cash by issuing a few shares.
How Risky Is Etihad Atheeb Telecommunication’s Cash Burn Situation?
It may already be apparent to you that we’re relatively comfortable with the way Etihad Atheeb Telecommunication is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. While its falling revenue wasn’t great, the other factors mentioned in this article more than make up for weakness on that measure. After taking into account the various metrics mentioned in this report, we’re pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. We think it’s very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what Etihad Atheeb Telecommunication’s CEO gets paid each year.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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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.
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