HSC Technology Group (ASX:HSC) Is In A Strong Position To Grow Its Business

Just because a business does not make any money, does not mean that the stock will go down. By way of example, HSC Technology Group (ASX:HSC) has seen its share price rise 220% over the last year, delighting many shareholders. 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.

In light of its strong share price run, we think now is a good time to investigate how risky HSC Technology Group's cash burn is. 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). Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for HSC Technology Group

How Long Is HSC Technology Group's Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In December 2020, HSC Technology Group had AU$4.5m in cash, and was debt-free. Importantly, its cash burn was AU$1.2m over the trailing twelve months. Therefore, from December 2020 it had 3.7 years of cash runway. A runway of this length affords the company the time and space it needs to develop the business. The image below shows how its cash balance has been changing over the last few years.

How Is HSC Technology Group's Cash Burn Changing Over Time?

Whilst it's great to see that HSC Technology Group has already begun generating revenue from operations, last year it only produced AU$3.1m, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Notably, its cash burn was actually down by 72% in the last year, which is a real positive in terms of resilience, but uninspiring when it comes to investment for growth. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how HSC Technology Group is growing revenue over time by checking this visualization of past revenue growth.

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

While we're comforted by the recent reduction evident from our analysis of HSC Technology Group's cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

HSC Technology Group has a market capitalisation of AU$31m and burnt through AU$1.2m last year, which is 3.8% 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.

Is HSC Technology Group's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about HSC Technology Group's 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 cash burn relative to its market cap was also very reassuring. 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. Taking a deeper dive, we've spotted 5 warning signs for HSC Technology Group you should be aware of, and 1 of them is significant.

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

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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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