Here's Why We're Not Too Worried About Keypath Education International's (ASX:KED) Cash Burn Situation

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 while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given this risk, we thought we'd take a look at whether Keypath Education International (ASX:KED) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Keypath Education International

How Long Is Keypath Education International's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2021, Keypath Education International had US$72m in cash, and was debt-free. In the last year, its cash burn was US$11m. That means it had a cash runway of about 6.6 years as of December 2021. Importantly, though, analysts think that Keypath Education International will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Keypath Education International Growing?

It was quite stunning to see that Keypath Education International increased its cash burn by 939% over the last year. While that isa little concerning at a glance, the company has a track record of recent growth, evidenced by the impressive 56% growth in revenue, over the very same year. In light of the data above, we're fairly sanguine about the business growth trajectory. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Hard Would It Be For Keypath Education International To Raise More Cash For Growth?

While Keypath Education International seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.

Keypath Education International has a market capitalisation of US$146m and burnt through US$11m last year, which is 7.4% of the company's market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

So, Should We Worry About Keypath Education International's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Keypath Education International is burning through its cash. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. One real positive is that analysts are forecasting that the company will reach breakeven. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. An in-depth examination of risks revealed 1 warning sign for Keypath Education International that readers should think about before committing capital to this stock.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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.