Here's Why We're Not Too Worried About Stream Ideas Group's (HKG:8401) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. Indeed, Stream Ideas Group (HKG:8401) stock is up 142% in the last year, providing strong gains for shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

In light of its strong share price run, we think now is a good time to investigate how risky Stream Ideas Group's cash burn is. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Stream Ideas Group

Does Stream Ideas 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. In September 2020, Stream Ideas Group had HK$43m in cash, and was debt-free. Looking at the last year, the company burnt through HK$13m. That means it had a cash runway of about 3.3 years as of September 2020. There's no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.

How Well Is Stream Ideas Group Growing?

Stream Ideas Group managed to reduce its cash burn by 67% over the last twelve months, which suggests it's on the right flight path. Unfortunately, however, operating revenue dropped 11% during the same time frame. On balance, we'd say the company is improving over time. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Stream Ideas Group is building its business over time.

How Hard Would It Be For Stream Ideas Group To Raise More Cash For Growth?

We are certainly impressed with the progress Stream Ideas Group has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Companies can raise capital through either debt or equity. 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).

Stream Ideas Group's cash burn of HK$13m is about 4.9% of its HK$266m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

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

It may already be apparent to you that we're relatively comfortable with the way Stream Ideas Group is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. 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. Taking a deeper dive, we've spotted 4 warning signs for Stream Ideas Group you should be aware of, and 1 of them doesn't sit too well with us.

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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