There's no doubt that money can be made by owning shares of unprofitable businesses. 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.

Given this risk, we thought we'd take a look at whether Prophecy International Holdings (ASX:PRO) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for Prophecy International Holdings

Does Prophecy International Holdings Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2022, Prophecy International Holdings had cash of AU$9.8m and no debt. Looking at the last year, the company burnt through AU$773k. That means it had a cash runway of very many years as of 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. The image below shows how its cash balance has been changing over the last few years.

Is Prophecy International Holdings' Revenue Growing?

Given that Prophecy International Holdings actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. 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 Hard Would It Be For Prophecy International Holdings To Raise More Cash For Growth?

Notwithstanding Prophecy International Holdings' revenue growth, it is still important to consider how it could raise more money, if it needs to. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Since it has a market capitalisation of AU$45m, Prophecy International Holdings' AU$773k in cash burn equates to about 1.7% 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.

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. For example, we think its cash runway suggests that the company is on a good path. But it's fair to say that its revenue growth was also very reassuring. 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 2 warning signs for Prophecy International Holdings (of which 1 shouldn't be ignored!) you should know about.

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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.