We're Keeping An Eye On Starward Industries Spólka Akcyjna's (WSE:STA) Cash Burn Rate

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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. 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.

Given this risk, we thought we'd take a look at whether Starward Industries Spólka Akcyjna (WSE:STA) shareholders should 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 the opportunities and risks within the PL Entertainment industry.

When Might Starward Industries Spólka Akcyjna Run Out Of Money?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at June 2022, Starward Industries Spólka Akcyjna had cash of zł1.6m and no debt. In the last year, its cash burn was zł3.2m. So it had a cash runway of approximately 6 months from June 2022. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. Depicted below, you can see how its cash holdings have changed over time.

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

Because Starward Industries Spólka Akcyjna isn't currently generating revenue, we consider it an early-stage 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 2.7%, 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. Starward Industries Spólka Akcyjna makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.

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

While its cash burn is only increasing slightly, Starward Industries Spólka Akcyjna shareholders should still consider the potential need for further cash, down the track. Companies can raise capital through either debt or equity. 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 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 zł128m, Starward Industries Spólka Akcyjna's zł3.2m in cash burn equates to about 2.5% of its market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

Is Starward Industries Spólka Akcyjna's Cash Burn A Worry?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Starward Industries Spólka Akcyjna's cash burn relative to its market cap was relatively promising. Summing up, we think the Starward Industries Spólka Akcyjna's cash burn is a risk, based on the factors we mentioned in this article. Taking a deeper dive, we've spotted 6 warning signs for Starward Industries Spólka Akcyjna you should be aware of, and 3 of them don't sit too well with us.

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. 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.