We're Hopeful That Demae-CanLtd (TYO:2484) Will Use Its Cash Wisely

We can readily understand why investors are attracted to unprofitable companies. For example, Demae-CanLtd (TYO:2484) shareholders have done very well over the last year, with the share price soaring by 163%. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So notwithstanding the buoyant share price, we think it's well worth asking whether Demae-CanLtd's cash burn is too risky. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Demae-CanLtd

When Might Demae-CanLtd Run Out Of Money?

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 Demae-CanLtd last reported its balance sheet in November 2020, it had zero debt and cash worth JP¥27b. Looking at the last year, the company burnt through JP¥2.0b. So it had a very long cash runway of many years from November 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. You can see how its cash balance has changed over time in the image below.

How Well Is Demae-CanLtd Growing?

One thing for shareholders to keep front in mind is that Demae-CanLtd increased its cash burn by 208% in the last twelve months. While that certainly gives us pause for thought, we take a lot of comfort in the strong annual revenue growth of 80%. In light of the data above, we're fairly sanguine about the business growth trajectory. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Hard Would It Be For Demae-CanLtd To Raise More Cash For Growth?

There's no doubt Demae-CanLtd 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. 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 JP¥232b, Demae-CanLtd's JP¥2.0b in cash burn equates to about 0.9% of its market value. 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 Demae-CanLtd's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Demae-CanLtd is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. 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 3 warning signs for Demae-CanLtd (1 is significant!) that you should be aware of before investing here.

Of course Demae-CanLtd 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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