We Think Smart Eye (STO:SEYE) Can Easily Afford To Drive Business 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Smart Eye (STO:SEYE) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for Smart Eye

How Long Is Smart Eye's Cash Runway?

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 March 2023, Smart Eye had cash of kr239m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was kr272m. That means it had a cash runway of around 11 months as of March 2023. Notably, however, analysts think that Smart Eye will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.

How Well Is Smart Eye Growing?

At first glance it's a bit worrying to see that Smart Eye actually boosted its cash burn by 33%, year on year. But looking on the bright side, its revenue gained by 59%, lending some credence to the growth narrative. The company needs to keep up that growth, if it is to really please shareholders. We think it is growing rather well, upon reflection. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can Smart Eye Raise More Cash Easily?

Smart Eye 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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.

Since it has a market capitalisation of kr1.7b, Smart Eye's kr272m in cash burn equates to about 16% of its market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

So, Should We Worry About Smart Eye's Cash Burn?

As you can probably tell by now, we're not too worried about Smart Eye's cash burn. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. It's clearly very positive to see that analysts are forecasting the company will break even fairly soon. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. On another note, Smart Eye has 3 warning signs (and 1 which is concerning) we think you should know about.

Of course Smart Eye 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.