Here's Why We're Not Too Worried About Creative Technology's (SGX:C76) Cash Burn Situation

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Creative Technology (SGX:C76) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Creative Technology

How Long Is Creative Technology's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2020, Creative Technology had US$98m in cash, and was debt-free. In the last year, its cash burn was US$4.1m. That means it had a cash runway of very many years as of December 2020. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.

How Well Is Creative Technology Growing?

Notably, Creative Technology actually ramped up its cash burn very hard and fast in the last year, by 116%, signifying heavy investment in the business. But the silver lining is that operating revenue increased by 37% in that time. In light of the data above, we're fairly sanguine about the business growth trajectory. In reality, this article only makes a short study of the company's growth data. You can take a look at how Creative Technology is growing revenue over time by checking this visualization of past revenue growth.

How Hard Would It Be For Creative Technology To Raise More Cash For Growth?

We are certainly impressed with the progress Creative Technology 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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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$143m, Creative Technology's US$4.1m in cash burn equates to about 2.8% 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 Creative Technology's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Creative Technology is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Taking an in-depth view of risks, we've identified 1 warning sign for Creative Technology that you should be aware of before investing.

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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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