We Think YLAB (KOSDAQ:432430) Can 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, 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 should YLAB (KOSDAQ:432430) shareholders be worried about its 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for YLAB

Does YLAB Have A Long Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When YLAB last reported its March 2024 balance sheet in May 2024, it had zero debt and cash worth ₩36b. In the last year, its cash burn was ₩12b. That means it had a cash runway of about 2.9 years as of March 2024. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.

How Well Is YLAB Growing?

It was quite stunning to see that YLAB increased its cash burn by 1,978% over the last year. On top of that, the fact that operating revenue was basically flat over the same period compounds the concern. Considering these two factors together makes us nervous about the direction the company seems to be heading. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how YLAB has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can YLAB Raise Cash?

Even though it seems like YLAB is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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).

YLAB's cash burn of ₩12b is about 8.0% of its ₩155b market capitalisation. 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.

So, Should We Worry About YLAB's Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought YLAB's cash runway was relatively promising. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for YLAB that potential shareholders should take into account before putting money into a stock.

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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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.

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