Companies Like Ocean Star Technology Group (HKG:8297) Are In A Position To Invest In Growth

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should Ocean Star Technology Group (HKG:8297) shareholders be worried about its cash burn? In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Ocean Star Technology Group

How Long Is Ocean Star Technology Group's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2021, Ocean Star Technology Group had HK$28m in cash, and was debt-free. Looking at the last year, the company burnt through HK$14m. Therefore, from September 2021 it had roughly 23 months of cash runway. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. You can see how its cash balance has changed over time in the image below.

Is Ocean Star Technology Group's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Ocean Star Technology Group actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 9.4%. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Ocean Star Technology Group has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Ocean Star Technology Group Raise Cash?

Since its revenue growth is moving in the wrong direction, Ocean Star Technology Group shareholders may wish to think ahead to when the company may need to raise more cash. 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. 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 HK$195m, Ocean Star Technology Group's HK$14m in cash burn equates to about 7.4% 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 Ocean Star Technology Group's Cash Burn Situation?

On this analysis of Ocean Star Technology Group's cash burn, we think its cash burn relative to its market cap was reassuring, while its falling revenue has us a bit worried. 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. Separately, we looked at different risks affecting the company and spotted 5 warning signs for Ocean Star Technology Group (of which 1 doesn't sit too well with us!) you should know about.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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.