Onano Industrial (TWSE:6405) Is In A Strong Position To Grow Its Business

Simply Wall St · 10/14 23:22

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Onano Industrial (TWSE:6405) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Onano Industrial

Does Onano Industrial Have A Long Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Onano Industrial last reported its June 2024 balance sheet in August 2024, it had zero debt and cash worth NT$1.4b. Importantly, its cash burn was NT$1.2m over the trailing twelve months. So it had a very long cash runway of many years from June 2024. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
TWSE:6405 Debt to Equity History October 14th 2024

How Well Is Onano Industrial Growing?

Onano Industrial managed to reduce its cash burn by 99% over the last twelve months, which is extremely promising, when it comes to considering its need for cash. Unfortunately, however, operating revenue dropped 34% during the same time frame. On balance, we'd say the company is improving over time. In reality, this article only makes a short study of the company's growth data. You can take a look at how Onano Industrial has developed its business over time by checking this visualization of its revenue and earnings history.

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

There's no doubt Onano Industrial seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Since it has a market capitalisation of NT$2.6b, Onano Industrial's NT$1.2m in cash burn equates to about 0.05% 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 Onano Industrial's Cash Burn?

As you can probably tell by now, we're not too worried about Onano Industrial's cash burn. For example, we think its cash burn reduction suggests that the company is on a good path. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Onano Industrial (2 can't be ignored!) that you should be aware of before investing here.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies with significant insider holdings, and this list of stocks growth stocks (according to analyst forecasts)