We Think Sung Bo Chemicals (KRX:003080) Can Easily Afford To Drive Business Growth

Just because a business does not make any money, does not mean that the stock will go down. 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. 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 Sung Bo Chemicals (KRX:003080) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Sung Bo Chemicals

Does Sung Bo Chemicals Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In December 2020, Sung Bo Chemicals had ₩37b in cash, and was debt-free. Importantly, its cash burn was ₩4.3b over the trailing twelve months. So it had a cash runway of about 8.6 years from December 2020. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. The image below shows how its cash balance has been changing over the last few years.

How Well Is Sung Bo Chemicals Growing?

It was fairly positive to see that Sung Bo Chemicals reduced its cash burn by 35% during the last year. On top of that, operating revenue was up 24%, making for a heartening combination It seems to be growing nicely. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Sung Bo Chemicals is building its business over time.

How Easily Can Sung Bo Chemicals Raise Cash?

There's no doubt Sung Bo Chemicals 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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Sung Bo Chemicals has a market capitalisation of ₩116b and burnt through ₩4.3b last year, which is 3.7% of the company's market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

How Risky Is Sung Bo Chemicals' Cash Burn Situation?

As you can probably tell by now, we're not too worried about Sung Bo Chemicals' cash burn. For example, we think its cash runway suggests that the company is on a good path. Its cash burn reduction wasn't quite as good, but was still rather encouraging! 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. Taking an in-depth view of risks, we've identified 3 warning signs for Sung Bo Chemicals that you should be aware of before investing.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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