Here's Why We're Not Too Worried About Janison Education Group's (ASX:JAN) Cash Burn Situation

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Janison Education Group (ASX:JAN) 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Janison Education Group

SWOT Analysis for Janison Education Group

How Long Is Janison Education 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. As at December 2022, Janison Education Group had cash of AU$6.1m and no debt. In the last year, its cash burn was AU$7.8m. So it had a cash runway of approximately 9 months from December 2022. Importantly, analysts think that Janison Education Group will reach cashflow breakeven in around 13 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 Janison Education Group Growing?

At first glance it's a bit worrying to see that Janison Education Group actually boosted its cash burn by 39%, year on year. The revenue growth of 15% gives a ray of hope, at the very least. 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 Easily Can Janison Education Group Raise Cash?

Since Janison Education 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. 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.

Since it has a market capitalisation of AU$102m, Janison Education Group's AU$7.8m in cash burn equates to about 7.6% of its 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.

How Risky Is Janison Education Group's Cash Burn Situation?

As you can probably tell by now, we're not too worried about Janison Education 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 its cash runway does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. There's no doubt that shareholders can take a lot of heart from the fact that analysts are 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. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for Janison Education Group that potential shareholders should take into account before putting money into a stock.

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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.