There’s no doubt that money can be made by owning shares of unprofitable businesses. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you’d have done very well indeed. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Scandinavian Enviro Systems (STO:SES) shareholders 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). First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
How Long Is Scandinavian Enviro Systems’s Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2019, Scandinavian Enviro Systems had cash of kr59m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was kr42m. That means it had a cash runway of around 17 months as of 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. Depicted below, you can see how its cash holdings have changed over time.
How Is Scandinavian Enviro Systems’s Cash Burn Changing Over Time?
Whilst it’s great to see that Scandinavian Enviro Systems has already begun generating revenue from operations, last year it only produced kr1.1m, so we don’t think it is generating significant revenue, at this point. As a result, we think it’s a bit early to focus on the revenue growth, so we’ll limit ourselves to looking at how the cash burn is changing over time. During the last twelve months, its cash burn actually ramped up 62%. While this spending increase is no doubt intended to drive growth, if the trend continues the company’s cash runway will shrink very quickly. Scandinavian Enviro Systems 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.
Can Scandinavian Enviro Systems Raise More Cash Easily?
Given its cash burn trajectory, Scandinavian Enviro Systems shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash to 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.
Scandinavian Enviro Systems has a market capitalisation of kr101m and burnt through kr42m last year, which is 41% of the company’s 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 Scandinavian Enviro Systems’s Cash Burn A Worry?
On this analysis of Scandinavian Enviro Systems’s cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. Summing up, we think the Scandinavian Enviro Systems’s cash burn is a risk, based on the factors we mentioned in this article. On another note, Scandinavian Enviro Systems has 6 warning signs (and 3 which are a bit concerning) we think you should know about.
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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