We're Not Very Worried About Seeing Machines' (LON:SEE) Cash Burn Rate

There's no doubt that money can be made by owning shares of unprofitable businesses. By way of example, Seeing Machines (LON:SEE) has seen its share price rise 219% 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.

Given its strong share price performance, we think it's worthwhile for Seeing Machines shareholders to consider whether its cash burn is concerning. 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Seeing Machines

Does Seeing Machines 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. In December 2020, Seeing Machines had AU$53m in cash, and was debt-free. In the last year, its cash burn was AU$22m. That means it had a cash runway of about 2.4 years as of December 2020. Importantly, analysts think that Seeing Machines will reach cashflow breakeven in 3 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. You can see how its cash balance has changed over time in the image below.

How Well Is Seeing Machines Growing?

We reckon the fact that Seeing Machines managed to shrink its cash burn by 31% over the last year is rather encouraging. And considering that its operating revenue gained 26% during that period, that's great to see. It seems to be growing nicely. 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.

How Easily Can Seeing Machines Raise Cash?

While Seeing Machines seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Companies can raise capital through either debt or equity. 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).

Since it has a market capitalisation of AU$638m, Seeing Machines' AU$22m in cash burn equates to about 3.4% 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 Seeing Machines' Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Seeing Machines is burning through its cash. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. Its cash burn reduction wasn't quite as good, but was still rather encouraging! Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. 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. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 3 warning signs for Seeing Machines that investors should know when investing in the stock.

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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