Here's Why We're Not Too Worried About SECOS Group's (ASX:SES) Cash Burn Situation

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.

So should SECOS Group (ASX:SES) shareholders be worried about its cash burn? In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Our analysis indicates that SES is potentially overvalued!

How Long Is SECOS Group's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2022, SECOS Group had AU$4.1m in cash, and was debt-free. In the last year, its cash burn was AU$6.5m. So it had a cash runway of approximately 8 months from June 2022. Notably, one analyst forecasts that SECOS Group will break even (at a free cash flow level) in about 9 months. So there's a very good chance it won't need more cash, when you consider the burn rate will be reducing in that period. The image below shows how its cash balance has been changing over the last few years.

How Well Is SECOS Group Growing?

At first glance it's a bit worrying to see that SECOS Group actually boosted its cash burn by 11%, year on year. The revenue growth of 3.2% gives a ray of hope, at the very least. In light of the data above, we're fairly sanguine about the business growth trajectory. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Easily Can SECOS Group Raise Cash?

Since SECOS Group has been boosting its cash burn, the market will likely be considering how it can raise more cash if need be. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

SECOS Group has a market capitalisation of AU$62m and burnt through AU$6.5m last year, which is 11% of the company's market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

Is SECOS Group's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about SECOS Group's cash burn. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. Although we do find its cash runway to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. There's no doubt that shareholders can take a lot of heart from the fact that at least one analyst is forecasting it will reach breakeven before too long. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for SECOS Group that investors should know when investing in the stock.

Of course SECOS Group may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.