There is no doubt that money can be made by owning shares of unprofitable companies. For example, although the software as a service company lost money for years as it increased its recurring revenue, if you had owned stocks since 2005, you would have done very well. That said, unprofitable businesses are risky because they could potentially spend all of their money and end up in distress.

In view of this risk, we thought to examine whether TruScreen Group (NZSE: TRU) shareholders should be concerned about its consumption of cash. For the purposes of this article, we’ll define cash consumption as the amount of cash the business spends each year to finance 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 consumption.

See our latest review for TruScreen Group

When could TruScreen Group run out of money?

You can calculate a company’s cash flow trail by dividing the amount of cash it has by the rate at which it spends that cash. As of March 2021, TruScreen Group had NZ $ 5.3 million in cash and no debt. In the past year, its cash consumption was NZ $ 2.3 million. So it had a cash flow trail of around 2.3 years from March 2021. It’s decent, giving the company a few years to grow its business. You can see how her cash balance has changed over time in the image below.

History of debt to equity NZSE: TRU June 8, 2021

How does the TruScreen Group’s cash consumption change over time?

In the past year, TruScreen Group reported revenues of NZ $ 2.0 million, but its operating income was lower, at just NZ $ 1.1 million. Given the weakness of this operating leverage, we believe it is too early to place much emphasis on revenue growth, so we will focus instead on the evolution of cash consumption. Over the past year, its cash consumption has actually increased by 40%, suggesting that management is increasing its investments in future growth, but not too quickly. This is not necessarily a bad thing, but investors should be aware that it will shorten the liquidity trail. If 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 analyst forecast for the company.

Can TruScreen Group easily raise more money?

While TruScreen Group has a strong cash flow track, its cash-consuming trajectory may cause some shareholders to reflect on when the company might need to raise more cash. Generally speaking, a listed company can raise new liquidity by issuing shares or going into debt. Many companies end up issuing new shares to fund their future growth. By comparing a company’s annual cash consumption to its total market capitalization, we can roughly estimate how many shares it would need to issue to keep the business running for another year (at the same burn rate).

As it has a market cap of NZ $ 28 million, TruScreen Group’s NZ $ 2.3 million of cash consumption is equivalent to approximately 8.2% of its market value. That’s a small proportion, so we think the company would be able to raise more cash to finance its growth, with a bit of dilution, or even just borrow money.

So, should we be worried about the cash consumption of the TruScreen Group?

On this analysis of TruScreen Group’s cash consumption, we think its cash trail was reassuring, while its growing cash consumption worries us a bit. Considering all the factors covered in this article, we are not too concerned about the company’s cash consumption, although we believe shareholders should keep an eye on its development. With an in-depth view of the risks, we have identified 4 warning signs for TruScreen Group that you need to know before you invest.

Of course, you might find a fantastic investment looking elsewhere. So take a look at this free list of interesting companies, and this list of growth stocks (according to analysts’ forecasts)

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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