We're Not Worried About Knowledge Economic City's (TADAWUL:4310) Cash Burn

We can readily understand why investors are attracted to unprofitable companies. For example, Knowledge Economic City (TADAWUL:4310) shareholders have done very well over the last year, with the share price soaring by 119%. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given its strong share price performance, we think it's worthwhile for Knowledge Economic City shareholders to consider whether its cash burn is concerning. 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Knowledge Economic City

How Long Is Knowledge Economic City's Cash Runway?

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. When Knowledge Economic City last reported its balance sheet in March 2021, it had zero debt and cash worth ر.س225m. In the last year, its cash burn was ر.س39m. So it had a cash runway of about 5.7 years from March 2021. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. You can see how its cash balance has changed over time in the image below.

How Well Is Knowledge Economic City Growing?

We reckon the fact that Knowledge Economic City managed to shrink its cash burn by 43% over the last year is rather encouraging. On top of that, operating revenue was up 21%, making for a heartening combination It seems to be growing nicely. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Knowledge Economic City has developed its business over time by checking this visualization of its revenue and earnings history.

Can Knowledge Economic City Raise More Cash Easily?

We are certainly impressed with the progress Knowledge Economic City 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. 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.

Knowledge Economic City's cash burn of ر.س39m is about 0.6% of its ر.س7.0b market capitalisation. 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.

So, Should We Worry About Knowledge Economic City's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Knowledge Economic City is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. And even though its revenue growth wasn't quite as impressive, it was still a positive. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 1 warning sign for Knowledge Economic City that potential shareholders should take into account before putting money into a stock.

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)

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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.
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