We're Interested To See How HSC Technology Group (ASX:HSC) Uses Its Cash Hoard To Grow

There's no doubt that money can be made by owning shares of unprofitable businesses. By way of example, HSC Technology Group (ASX:HSC) has seen its share price rise 240% over the last year, delighting many shareholders. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So notwithstanding the buoyant share price, we think it's well worth asking whether HSC Technology Group's cash burn is too risky. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for HSC Technology Group

Does HSC Technology Group Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When HSC Technology Group last reported its balance sheet in December 2020, it had zero debt and cash worth AU$4.5m. In the last year, its cash burn was AU$1.2m. That means it had a cash runway of about 3.7 years as of December 2020. A runway of this length affords the company the time and space it needs to develop the business. Depicted below, you can see how its cash holdings have changed over time.

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

In our view, HSC Technology Group doesn't yet produce significant amounts of operating revenue, since it reported just AU$3.1m in the last twelve months. 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 Easily Can HSC Technology Group Raise Cash?

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. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

HSC Technology Group's cash burn of AU$1.2m is about 3.8% of its AU$32m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is HSC Technology Group's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way HSC Technology Group is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. But it's fair to say that its cash burn relative to its market cap was also very reassuring. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for HSC Technology Group (1 is concerning!) that you should be aware of before investing here.

Of course HSC Technology 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.

If you’re looking to trade HSC Technology Group, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.