Will Sun-Life HoldingLtd (TYO:7040) Spend Its Cash Wisely?

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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.

So, the natural question for Sun-Life HoldingLtd (TYO:7040) shareholders is whether they should be concerned by its rate of cash burn. 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 Sun-Life HoldingLtd

Does Sun-Life HoldingLtd 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. When Sun-Life HoldingLtd last reported its balance sheet in December 2020, it had zero debt and cash worth JP¥8.4b. In the last year, its cash burn was JP¥1.3b. So it had a cash runway of about 6.4 years from December 2020. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.

How Well Is Sun-Life HoldingLtd Growing?

Notably, Sun-Life HoldingLtd actually ramped up its cash burn very hard and fast in the last year, by 164%, signifying heavy investment in the business. As if that's not bad enough, the operating revenue also dropped by 13%, making us very wary indeed. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. In reality, this article only makes a short study of the company's growth data. You can take a look at how Sun-Life HoldingLtd has developed its business over time by checking this visualization of its revenue and earnings history.

Can Sun-Life HoldingLtd Raise More Cash Easily?

Sun-Life HoldingLtd seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Sun-Life HoldingLtd's cash burn of JP¥1.3b is about 27% of its JP¥4.9b market capitalisation. 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 Sun-Life HoldingLtd's Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Sun-Life HoldingLtd's cash runway was relatively promising. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Sun-Life HoldingLtd (1 is potentially serious!) that you should be aware of before investing here.

Of course Sun-Life HoldingLtd may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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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