We're Not Worried About Prophecy International Holdings' (ASX:PRO) Cash Burn

Just because a business does not make any money, does not mean that the stock will go down. 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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Prophecy International Holdings (ASX:PRO) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Prophecy International Holdings

When Might Prophecy International Holdings 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. In December 2022, Prophecy International Holdings had AU$9.8m in cash, and was debt-free. Importantly, its cash burn was AU$773k over the trailing twelve months. So it had a very long cash runway of many years from December 2022. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. You can see how its cash balance has changed over time in the image below.

Is Prophecy International Holdings' Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Prophecy International Holdings actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. It's nice to see that operating revenue was up 27% in the last year. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Prophecy International Holdings is building its business over time.

How Easily Can Prophecy International Holdings Raise Cash?

Notwithstanding Prophecy International Holdings' revenue growth, it is still important to consider how it could raise more money, if it needs to. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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).

Prophecy International Holdings' cash burn of AU$773k is about 2.1% of its AU$37m market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

How Risky Is Prophecy International Holdings' Cash Burn Situation?

As you can probably tell by now, we're not too worried about Prophecy International Holdings' cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. And even its revenue growth was very encouraging. 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. Taking a deeper dive, we've spotted 2 warning signs for Prophecy International Holdings you should be aware of, and 1 of them shouldn't be ignored.

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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