Yahoo Finance We're Not Worried About Pacific Edge's (NZSE:PEB) Cash Burn
Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should Pacific Edge (NZSE:PEB) shareholders 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.
See our latest analysis for Pacific Edge
How Long Is Pacific Edge's Cash Runway?
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. As at September 2021, Pacific Edge had cash of NZ$92m and no debt. Looking at the last year, the company burnt through NZ$15m. That means it had a cash runway of about 6.1 years as of September 2021. Importantly, though, analysts think that Pacific Edge will reach cashflow breakeven 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 Pacific Edge Growing?
Pacific Edge reduced its cash burn by 5.3% during the last year, which points to some degree of discipline. Having said that, the revenue growth of 80% was considerably more inspiring. 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 Hard Would It Be For Pacific Edge To Raise More Cash For Growth?
While Pacific Edge 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. 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. 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.
Pacific Edge has a market capitalisation of NZ$640m and burnt through NZ$15m last year, which is 2.4% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
Is Pacific Edge's Cash Burn A Worry?
As you can probably tell by now, we're not too worried about Pacific Edge's cash burn. For example, we think its revenue growth suggests that the company is on a good path. On this analysis its cash burn reduction was its weakest feature, but we are not concerned about it. One real positive is that analysts are forecasting that the company will reach breakeven. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Pacific Edge (of which 1 is concerning!) you should know about.
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)
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
