Here's Why Saietta Group (LON:SED) Must Use Its Cash Wisely

There's no doubt that money can be made by owning shares of unprofitable businesses. 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?

Given this risk, we thought we'd take a look at whether Saietta Group (LON:SED) shareholders should 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Saietta Group

Does Saietta Group Have A Long 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 September 2022, Saietta Group had cash of UK£23m and no debt. Looking at the last year, the company burnt through UK£29m. That means it had a cash runway of around 10 months as of September 2022. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Saietta Group Growing?

One thing for shareholders to keep front in mind is that Saietta Group increased its cash burn by 493% in the last twelve months. It seems likely that the vociferous operating revenue growth of 121% during that time may well have given management confidence to ramp investment. 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. So you might want to take a peek at how much the company is expected to grow in the next few years.

Can Saietta Group Raise More Cash Easily?

Given the trajectory of Saietta Group's cash burn, many investors will already be thinking about how it might raise more cash in the future. 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 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).

Saietta Group has a market capitalisation of UK£46m and burnt through UK£29m last year, which is 63% of the company's market value. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.

So, Should We Worry About Saietta Group's Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Saietta Group's revenue growth was relatively promising. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. On another note, Saietta Group has 6 warning signs (and 3 which are a bit concerning) we think you should know about.

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. 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.