We Think SECOS Group (ASX:SES) Can Easily Afford To Drive Business Growth

We can readily understand why investors are attracted to unprofitable companies. For example, SECOS Group (ASX:SES) shareholders have done very well over the last year, with the share price soaring by 288%. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given its strong share price performance, we think it's worthwhile for SECOS Group shareholders to consider whether its cash burn is concerning. 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for SECOS Group

Does SECOS Group 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. SECOS Group has such a small amount of debt that we'll set it aside, and focus on the AU$14m in cash it held at December 2020. In the last year, its cash burn was AU$2.5m. That means it had a cash runway of about 5.7 years as of December 2020. Importantly, though, the one analyst we see covering the stock thinks that SECOS Group will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. 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 15% gives a ray of hope, at the very least. On balance, we'd say the company is improving over time. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Hard Would It Be For SECOS Group To Raise More Cash For Growth?

There's no doubt SECOS Group 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. 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. 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$121m and burnt through AU$2.5m last year, which is 2.1% of the company's 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 SECOS Group's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way SECOS Group is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. 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. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 3 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. 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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