We Think Cuscapi Berhad (KLSE:CUSCAPI) 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, Cuscapi Berhad (KLSE:CUSCAPI) shareholders have done very well over the last year, with the share price soaring by 132%. 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 notwithstanding the buoyant share price, we think it's well worth asking whether Cuscapi Berhad's cash burn is too risky. 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Cuscapi Berhad

When Might Cuscapi Berhad Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Cuscapi Berhad last reported its balance sheet in June 2021, it had zero debt and cash worth RM17m. Importantly, its cash burn was RM1.5m over the trailing twelve months. That means it had a cash runway of very many years as of June 2021. 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 Cuscapi Berhad Growing?

Given our focus on Cuscapi Berhad's cash burn, we're delighted to see that it reduced its cash burn by a nifty 92%. But the top line growth tells a different story, with operating revenue falling 52% in that time. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. 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 Cuscapi Berhad is building its business over time.

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

We are certainly impressed with the progress Cuscapi Berhad 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. 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 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 RM198m, Cuscapi Berhad's RM1.5m in cash burn equates to about 0.8% of its 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 Cuscapi Berhad's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Cuscapi Berhad is burning through its cash. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. While we must concede that its falling revenue 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. Taking an in-depth view of risks, we've identified 3 warning signs for Cuscapi Berhad that you should be aware of before investing.

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)

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.

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