We're Not Very Worried About Kuen Chaang Uppertech's (GTSM:6265) Cash Burn Rate

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should Kuen Chaang Uppertech (GTSM:6265) shareholders 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 our latest analysis for Kuen Chaang Uppertech

When Might Kuen Chaang Uppertech 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. In September 2020, Kuen Chaang Uppertech had NT$680m in cash, and was debt-free. Importantly, its cash burn was NT$142m over the trailing twelve months. So it had a cash runway of about 4.8 years from September 2020. A runway of this length affords the company the time and space it needs to develop the business. You can see how its cash balance has changed over time in the image below.

Is Kuen Chaang Uppertech's Revenue Growing?

Given that Kuen Chaang Uppertech actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 3.4%. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Kuen Chaang Uppertech is building its business over time.

How Easily Can Kuen Chaang Uppertech Raise Cash?

Since its revenue growth is moving in the wrong direction, Kuen Chaang Uppertech 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. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Kuen Chaang Uppertech has a market capitalisation of NT$887m and burnt through NT$142m last year, which is 16% of the company's market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

How Risky Is Kuen Chaang Uppertech's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Kuen Chaang Uppertech is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Taking a deeper dive, we've spotted 2 warning signs for Kuen Chaang Uppertech you should be aware of, and 1 of them is a bit unpleasant.

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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