We're Not Worried About iSTART-TEK's (GTSM:6786) Cash Burn

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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for iSTART-TEK (GTSM:6786) 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'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for iSTART-TEK

How Long Is iSTART-TEK's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. iSTART-TEK has such a small amount of debt that we'll set it aside, and focus on the NT$143m in cash it held at June 2020. Importantly, its cash burn was NT$37m over the trailing twelve months. Therefore, from June 2020 it had 3.8 years of cash runway. There's no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.

How Is iSTART-TEK's Cash Burn Changing Over Time?

Whilst it's great to see that iSTART-TEK has already begun generating revenue from operations, last year it only produced NT$16m, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. With the cash burn rate up 29% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. Admittedly, we're a bit cautious of iSTART-TEK due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.

Can iSTART-TEK Raise More Cash Easily?

While iSTART-TEK does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.

iSTART-TEK has a market capitalisation of NT$3.8b and burnt through NT$37m last year, which is 1.0% of the company's 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.

How Risky Is iSTART-TEK's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way iSTART-TEK is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. 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. On another note, iSTART-TEK has 3 warning signs (and 1 which can't be ignored) we think you should know about.

Of course iSTART-TEK 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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