We're Hopeful That So-Cayenne Mobile Entertainment (GTSM:6736) Will Use Its Cash Wisely

Just because a business does not make any money, does not mean that the stock will go down. 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.

Given this risk, we thought we'd take a look at whether So-Cayenne Mobile Entertainment (GTSM:6736) shareholders should be worried about its 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for So-Cayenne Mobile Entertainment

When Might So-Cayenne Mobile Entertainment Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at June 2020, So-Cayenne Mobile Entertainment had cash of NT$41m and no debt. In the last year, its cash burn was NT$26m. Therefore, from June 2020 it had roughly 19 months of cash runway. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.

Is So-Cayenne Mobile Entertainment's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because So-Cayenne Mobile Entertainment actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. The harsh truth is that operating revenue dropped 73% in the last year, which is quite problematic for a cash burning company. In reality, this article only makes a short study of the company's growth data. You can take a look at how So-Cayenne Mobile Entertainment has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For So-Cayenne Mobile Entertainment To Raise More Cash For Growth?

Since its revenue growth is moving in the wrong direction, So-Cayenne Mobile Entertainment shareholders may wish to think ahead to when the company may need to raise more cash. 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. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

So-Cayenne Mobile Entertainment's cash burn of NT$26m is about 4.2% of its NT$613m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is So-Cayenne Mobile Entertainment's Cash Burn A Worry?

On this analysis of So-Cayenne Mobile Entertainment's cash burn, we think its cash burn relative to its market cap was reassuring, while its falling revenue has us a bit worried. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. On another note, So-Cayenne Mobile Entertainment has 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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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