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. By way of example, Stream Ideas Group (HKG:8401) has seen its share price rise 269% over the last year, delighting many shareholders. 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.

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 purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Stream Ideas Group

Does Stream Ideas Group 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 September 2020, Stream Ideas Group had cash of HK$43m and no debt. Importantly, its cash burn was HK$13m over the trailing twelve months. Therefore, from September 2020 it had 3.3 years of cash runway. A runway of this length affords the company the time and space it needs to develop the business. The image below shows how its cash balance has been changing over the last few years.

How Well Is Stream Ideas Group Growing?

We reckon the fact that Stream Ideas Group managed to shrink its cash burn by 44% over the last year is rather encouraging. But the revenue dip of 14% in the same period was a bit concerning. 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 Easily Can Stream Ideas Group Raise Cash?

There's no doubt Stream Ideas Group seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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$436m, Stream Ideas Group's HK$13m in cash burn equates to about 3.0% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

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

As you can probably tell by now, we're not too worried about Stream Ideas Group's cash burn. For example, we think its cash runway suggests that the company is on a good path. 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. On another note, Stream Ideas Group has 4 warning signs (and 1 which makes us a bit uncomfortable) we think 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. 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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