We're Not Worried About Smart Eye's (STO:SEYE) Cash Burn

Just because a business does not make any money, does not mean that the stock will go down. For example, Smart Eye (STO:SEYE) shareholders have done very well over the last year, with the share price soaring by 146%. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So notwithstanding the buoyant share price, we think it's well worth asking whether Smart Eye's cash burn is too risky. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Smart Eye

Does Smart Eye Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2020, Smart Eye had cash of kr219m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through kr104m. That means it had a cash runway of about 2.1 years as of December 2020. Notably, however, the one analyst we see covering the stock thinks 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. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Smart Eye Growing?

It was fairly positive to see that Smart Eye reduced its cash burn by 21% during the last year. And operating revenue was up by 16% too. On balance, we'd say the company is improving over time. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Hard Would It Be For Smart Eye To Raise More Cash For Growth?

While Smart Eye seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Since it has a market capitalisation of kr3.5b, Smart Eye's kr104m in cash burn equates to about 2.9% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

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

It may already be apparent to you that we're relatively comfortable with the way Smart Eye is burning through its cash. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. On this analysis its cash burn reduction was its weakest feature, but we are not concerned about it. There's no doubt that shareholders can take a lot of heart from the fact that at least one analyst is forecasting it will reach breakeven before too long. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 1 warning sign for Smart Eye that potential shareholders should take into account before putting money into a stock.

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. 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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