Here's Why We're Not At All Concerned With Heartseed's (TSE:219A) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. 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.

So, the natural question for Heartseed (TSE:219A) 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

When Might Heartseed Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at October 2024, Heartseed had cash of JP¥5.3b and no debt. Looking at the last year, the company burnt through JP¥1.4b. So it had a cash runway of about 3.9 years from October 2024. A runway of this length affords the company the time and space it needs to develop the business. Depicted below, you can see how its cash holdings have changed over time.

View our latest analysis for Heartseed

How Well Is Heartseed Growing?

Some investors might find it troubling that Heartseed is actually increasing its cash burn, which is up 21% in the last year. On a more positive note, the operating revenue improved by 153% over the period, offering an indication that the expenditure may well be worthwhile. If revenue is maintained once spending on growth decreases, that could well pay off! 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 Heartseed is growing revenue over time by checking this visualization of past revenue growth.

How Hard Would It Be For Heartseed To Raise More Cash For Growth?

We are certainly impressed with the progress Heartseed 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 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.

Heartseed has a market capitalisation of JP¥61b and burnt through JP¥1.4b last year, which is 2.2% of the company's 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.

Is Heartseed's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Heartseed is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. Although its increasing cash burn 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, we conducted an in-depth investigation of the company, and identified 2 warning signs for Heartseed (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies with significant insider holdings, and this list of stocks growth stocks (according to analyst forecasts)

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.