There’s no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. 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.
So, the natural question for Sealand Capital Galaxy (LON:SCGL) shareholders is whether they should be concerned by its rate of 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. Let’s start with an examination of the business’s cash, relative to its cash burn.
Does Sealand Capital Galaxy 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. As at June 2019, Sealand Capital Galaxy had cash of UK£62k and no debt. In the last year, its cash burn was UK£478k. So it had a cash runway of approximately 2 months from June 2019. It’s extremely surprising to us that the company has allowed its cash runway to get that short! You can see how its cash balance has changed over time in the image below.
How Is Sealand Capital Galaxy’s Cash Burn Changing Over Time?
Whilst it’s great to see that Sealand Capital Galaxy has already begun generating revenue from operations, last year it only produced UK£587k, 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. We’d venture that the 68% reduction in cash burn over the last year shows that management are, at least, mindful of its ongoing need for cash. Sealand Capital Galaxy makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Easily Can Sealand Capital Galaxy Raise Cash?
There’s no doubt Sealand Capital Galaxy’s rapidly reducing cash burn brings comfort, but even if it’s only hypothetical, it’s always worth asking how easily it could raise more money to fund further growth. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash to drive 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.
Sealand Capital Galaxy has a market capitalisation of UK£2.0m and burnt through UK£478k last year, which is 24% of the company’s market value. That’s not insignificant, and if the company had to sell enough shares to fund another year’s growth at the current share price, you’d likely witness fairly costly dilution.
Is Sealand Capital Galaxy’s Cash Burn A Worry?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Sealand Capital Galaxy’s cash burn reduction 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, we conducted an in-depth investigation of the company, and identified 5 warning signs for Sealand Capital Galaxy (4 can’t be ignored!) that you should be aware of before investing here.
Of course Sealand Capital Galaxy 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 spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned.
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