Will Creative Technology (SGX:C76) Spend Its Cash Wisely?

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. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given this risk, we thought we'd take a look at whether Creative Technology (SGX:C76) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out the opportunities and risks within the XX Tech industry.

When Might Creative Technology Run Out Of Money?

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 Creative Technology last reported its balance sheet in June 2022, it had zero debt and cash worth US$71m. Looking at the last year, the company burnt through US$20m. So it had a cash runway of about 3.6 years from June 2022. There's no doubt that this is a reassuringly long runway. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Creative Technology Growing?

Notably, Creative Technology actually ramped up its cash burn very hard and fast in the last year, by 102%, signifying heavy investment in the business. As if that's not bad enough, the operating revenue also dropped by 27%, making us very wary indeed. Considering these two factors together makes us nervous about the direction the company seems to be heading. In reality, this article only makes a short study of the company's growth data. You can take a look at how Creative Technology has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Creative Technology Raise Cash?

Creative 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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 US$81m, Creative Technology's US$20m in cash burn equates to about 25% of its market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

How Risky Is Creative Technology's Cash Burn Situation?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Creative Technology's cash runway was relatively promising. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. Taking a deeper dive, we've spotted 3 warning signs for Creative Technology you should be aware of, and 1 of them is a bit concerning.

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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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.