Here's Why We're Not Too Worried About K-One Technology Berhad's (KLSE:K1) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. 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 K-One Technology Berhad (KLSE:K1) shareholders be worried about its cash burn? 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.

See our latest analysis for K-One Technology Berhad

When Might K-One Technology Berhad Run Out Of Money?

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. As at March 2022, K-One Technology Berhad had cash of RM44m and no debt. In the last year, its cash burn was RM11m. Therefore, from March 2022 it had 4.2 years of cash runway. 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.

How Well Is K-One Technology Berhad Growing?

Notably, K-One Technology Berhad actually ramped up its cash burn very hard and fast in the last year, by 145%, signifying heavy investment in the business. But the silver lining is that operating revenue increased by 26% in that time. Considering both these metrics, we're a little concerned about how the company is developing. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how K-One Technology Berhad has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can K-One Technology Berhad Raise Cash?

While K-One Technology Berhad seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. 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.

K-One Technology Berhad's cash burn of RM11m is about 11% of its RM96m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

How Risky Is K-One Technology Berhad's Cash Burn Situation?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought K-One Technology Berhad's cash runway was relatively promising. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for K-One Technology Berhad that investors should know when investing in the 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.