We Think Starward Industries Spólka Akcyjna (WSE:STA) Can Afford To Drive Business Growth

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should Starward Industries Spólka Akcyjna (WSE:STA) 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'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Starward Industries Spólka Akcyjna

When Might Starward Industries Spólka Akcyjna Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Starward Industries Spólka Akcyjna last reported its balance sheet in December 2019, it had zero debt and cash worth zł3.4m. In the last year, its cash burn was zł2.0m. So it had a cash runway of approximately 20 months from December 2019. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. The image below shows how its cash balance has been changing over the last few years.

How Is Starward Industries Spólka Akcyjna's Cash Burn Changing Over Time?

Starward Industries Spólka Akcyjna didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. Over the last year its cash burn actually increased by 8.3%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. Admittedly, we're a bit cautious of Starward Industries Spólka Akcyjna due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Hard Would It Be For Starward Industries Spólka Akcyjna To Raise More Cash For Growth?

Since its cash burn is increasing (albeit only slightly), Starward Industries Spólka Akcyjna shareholders should still be mindful of the possibility it will require more cash in the future. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Since it has a market capitalisation of zł188m, Starward Industries Spólka Akcyjna's zł2.0m in cash burn equates to about 1.1% 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.

So, Should We Worry About Starward Industries Spólka Akcyjna's Cash Burn?

On this analysis of Starward Industries Spólka Akcyjna's cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Taking an in-depth view of risks, we've identified 3 warning signs for Starward Industries Spólka Akcyjna that you should be aware of before investing.

Of course Starward Industries Spólka Akcyjna 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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