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, AnteoTech (ASX:ADO) shareholders have done very well over the last year, with the share price soaring by 840%. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given its strong share price performance, we think it's worthwhile for AnteoTech shareholders to consider whether its cash burn is concerning. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for AnteoTech

When Might AnteoTech Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at June 2020, AnteoTech had cash of AU$3.2m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through AU$2.8m. Therefore, from June 2020 it had roughly 14 months of cash runway. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time. debt-equity-history-analysis

How Is AnteoTech's Cash Burn Changing Over Time?

In the last year, AnteoTech did book revenue of AU$1.3m, but its revenue from operations was less, at just AU$299k. Given how low that operating leverage is, we think it's too early to put much weight on the revenue growth, so we'll focus on how the cash burn is changing, instead. With the cash burn rate up 14% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. Admittedly, we're a bit cautious of AnteoTech due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.



How Hard Would It Be For AnteoTech To Raise More Cash For Growth?

While AnteoTech does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. 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).

Since it has a market capitalisation of AU$458m, AnteoTech's AU$2.8m in cash burn equates to about 0.6% of its 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.

So, Should We Worry About AnteoTech's Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought AnteoTech's cash burn relative to its market cap 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 AnteoTech's situation. An in-depth examination of risks revealed 4 warning signs for AnteoTech that readers should think about before committing capital to this stock.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this freelist of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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.

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