Is Smart Wires Technology (STO:GOGRID SDB) In A Good Position To Invest In Growth?

We can readily understand why investors are attracted to unprofitable companies. 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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Smart Wires Technology (STO:GOGRID SDB) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Smart Wires Technology

Does Smart Wires Technology Have A Long Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Smart Wires Technology last reported its balance sheet in September 2021, it had zero debt and cash worth US$90m. In the last year, its cash burn was US$73m. Therefore, from September 2021 it had roughly 15 months of cash runway. Importantly, the one analyst we see covering the stock thinks that Smart Wires Technology will reach cashflow breakeven in 3 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. The image below shows how its cash balance has been changing over the last few years.

How Well Is Smart Wires Technology Growing?

At first glance it's a bit worrying to see that Smart Wires Technology actually boosted its cash burn by 15%, year on year. On a more positive note, the operating revenue improved by 137% over the period, offering an indication that the expenditure may well be worthwhile. If that revenue does keep flowing reliably, then the company could see a strong improvement in free cash flow simply by reducing growth expenditure. It seems to be growing nicely. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can Smart Wires Technology Raise More Cash Easily?

Smart Wires Technology seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. 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 US$127m, Smart Wires Technology's US$73m in cash burn equates to about 57% of its market value. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.

Is Smart Wires Technology's Cash Burn A Worry?

On this analysis of Smart Wires Technology's cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap has us a bit worried. Shareholders can take heart from the fact that at least one analyst is forecasting it will reach breakeven. Summing up, we think the Smart Wires Technology's cash burn is a risk, based on the factors we mentioned in this article. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for Smart Wires Technology 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 companies insiders are buying, 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.