We're A Little Worried About 17 Education & Technology Group's (NASDAQ:YQ) Cash Burn Rate

We can readily understand why investors are attracted to unprofitable companies. 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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether 17 Education & Technology Group (NASDAQ:YQ) shareholders should be worried about its cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for 17 Education & Technology Group

Does 17 Education & Technology Group Have A Long Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In June 2023, 17 Education & Technology Group had CN¥267m in cash, and was debt-free. Looking at the last year, the company burnt through CN¥467m. So it had a cash runway of approximately 7 months from June 2023. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. You can see how its cash balance has changed over time in the image below.

How Well Is 17 Education & Technology Group Growing?

Happily, 17 Education & Technology Group is travelling in the right direction when it comes to its cash burn, which is down 56% over the last year. In contrast, operating revenue was down 83%. Downright suboptimal! Considering both these metrics, we're a little concerned about how the company is developing. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how 17 Education & Technology Group has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For 17 Education & Technology Group To Raise More Cash For Growth?

Given 17 Education & Technology Group's revenue is receding, there's a considerable chance it will eventually need to raise more money to spend on driving growth. Companies can raise capital through either debt or equity. 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.

17 Education & Technology Group has a market capitalisation of CN¥239m and burnt through CN¥467m last year, which is 195% of the company's market value. Given just how high that expenditure is, relative to the company's market value, we think there's an elevated risk of funding distress, and we would be very nervous about holding the stock.

Is 17 Education & Technology Group's Cash Burn A Worry?

There are no prizes for guessing that we think 17 Education & Technology Group's cash burn is a bit of a worry. In particular, we think its cash burn relative to its market cap suggests it isn't in a good position to keep funding growth. But the silver lining was its cash burn reduction, which was encouraging. Once we consider the metrics mentioned in this article together, we're left with very little confidence in the company's ability to manage its cash burn, and we think it will probably need more money. On another note, 17 Education & Technology Group has 2 warning signs (and 1 which can't be ignored) we think you should know about.

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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.