Even when a company loses money, it is possible for shareholders to make money if they buy a good company at the right price. For example, although software-as-a-service company Salesforce.com lost money for years as it grew recurring revenue, if you had held stock since 2005, you would have done very well. But while the success stories are well known, investors shouldn’t ignore the many, many unprofitable companies that simply burn all their money and crash.
So should Search Solutions (NASDAQ:RSSS) Are shareholders worried about its cash burn? For the purposes of this article, we will define cash burn as the amount of money the business spends each year to fund its growth (also known as negative free cash flow). Let’s start with a review of the company’s cash flow, relative to its cash burn.
Do search solutions have a long cash trail?
A company’s cash track is the time it would take to deplete its cash reserves at its current rate of cash consumption. As of March 2022, Research Solutions had cash of US$11 million and no debt. Looking at last year, the company burned US$797,000. This means that he had a cash trail of many, many years from March 2022. While this is only a measure of his cash burn situation, it certainly gives us the impression that the holders have nothing to fear. The image below shows how his cash balance has changed over the past few years.
Are Research Solutions revenues growing?
Since Research Solutions actually had positive free cash flow last year, before burning cash this year, we will focus on its operating revenue to get a measure of business trajectory. While not stellar growth, it’s good to see that the company has grown its revenue by 3.7% over the past year. While the past is always worth studying, it is the future that matters most. For this reason, it makes a lot of sense to take a look at our analysts’ forecasts for the company.
Can search solutions raise more money easily?
While Research Solutions is posting solid revenue growth, it’s still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares or going into debt are the most common ways for a listed company to raise more funds for its business. Typically, a company will sell new stock on its own to raise cash and drive growth. We can compare a company’s cash burn to its market capitalization to get an idea of how many new shares a company would need to issue to fund a year’s operations.
With a market capitalization of $50 million, Research Solutions’ cash burn of $797,000 equates to approximately 1.6% of its market value. This means it could easily issue a few shares to fund more growth and may well be able to borrow cheaply.
So should we be worried about Research Solutions’ cash burn?
It may already be obvious to you that we are relatively comfortable with the way Research Solutions is burning through its cash. In particular, we think its cash trail stands out as proof that the company is on top of spending. Its weak point is its revenue growth, but even that wasn’t so bad! Considering all the factors in this report, we are not at all worried about its cash burn, as the company appears to be well capitalized to spend as needed. It is important for readers to be aware of the risks that can affect company operations, and we have selected 3 warning signs for Research Solutions investors need to know when investing in the stock.
If you prefer to consult another company with better fundamentals, do not miss this free list of interesting companies, which have a high return on equity and low debt or this list of stocks which should all grow.
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