Here's Why We're Not At All Concerned With Gala's (TYO:4777) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether Gala (TYO:4777) shareholders should 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'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Gala

How Long Is Gala's 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 Gala last reported its balance sheet in December 2020, it had zero debt and cash worth JP¥438m. Importantly, its cash burn was JP¥148m over the trailing twelve months. That means it had a cash runway of about 3.0 years as of December 2020. Arguably, that's a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Gala Growing?

It was fairly positive to see that Gala reduced its cash burn by 54% during the last year. And considering that its operating revenue gained 37% during that period, that's great to see. We think it is growing rather well, upon reflection. In reality, this article only makes a short study of the company's growth data. You can take a look at how Gala is growing revenue over time by checking this visualization of past revenue growth.

Can Gala Raise More Cash Easily?

We are certainly impressed with the progress Gala 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. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

Gala's cash burn of JP¥148m is about 2.7% of its JP¥5.6b market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

Is Gala's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Gala's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. But it's fair to say that its cash burn reduction was also very reassuring. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 3 warning signs for Gala that potential shareholders should take into account before putting money into a stock.

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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