Here's Why We're A Bit Worried About Sky Blue 11's (HKG:1010) Cash Burn Situation

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for Sky Blue 11 (HKG:1010) shareholders is whether they should be concerned by its rate of cash burn. 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'.

See our latest analysis for Sky Blue 11

Does Sky Blue 11 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 2024, Sky Blue 11 had cash of HK$68m and no debt. In the last year, its cash burn was HK$72m. That means it had a cash runway of around 11 months as of June 2024. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.

Is Sky Blue 11's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Sky Blue 11 actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. The bad news for shareholders is that operating revenue actually plummeted 88% in the last year, which is a real concern in our view. In reality, this article only makes a short study of the company's growth data. You can take a look at how Sky Blue 11 has developed its business over time by checking this visualization of its revenue and earnings history.

Can Sky Blue 11 Raise More Cash Easily?

Since its revenue growth is moving in the wrong direction, Sky Blue 11 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. Commonly, a business will sell new shares in itself to raise cash and drive growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Since it has a market capitalisation of HK$227m, Sky Blue 11's HK$72m in cash burn equates to about 32% of its market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

Is Sky Blue 11's Cash Burn A Worry?

We must admit that we don't think Sky Blue 11 is in a very strong position, when it comes to its cash burn. While its cash runway wasn't too bad, its falling revenue does leave us rather nervous. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. Separately, we looked at different risks affecting the company and spotted 6 warning signs for Sky Blue 11 (of which 3 are significant!) you should know about.

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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.