We Think Four Seasons Education (Cayman) (NYSE:FEDU) Can Afford To Drive Business Growth

There's no doubt that money can be made by owning shares of unprofitable businesses. 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. 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 Four Seasons Education (Cayman) (NYSE:FEDU) 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'. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Four Seasons Education (Cayman)

Does Four Seasons Education (Cayman) Have A Long Cash Runway?

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. Four Seasons Education (Cayman) has such a small amount of debt that we'll set it aside, and focus on the CN¥492m in cash it held at February 2023. Looking at the last year, the company burnt through CN¥34m. So it had a very long cash runway of many years from February 2023. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.

How Well Is Four Seasons Education (Cayman) Growing?

Four Seasons Education (Cayman) managed to reduce its cash burn by 66% over the last twelve months, which suggests it's on the right flight path. In contrast, however, operating revenue fell by 86% during that same period. Starkly suboptimal! Considering both these factors, we're not particularly excited by its growth profile. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Four Seasons Education (Cayman) is building its business over time.

Can Four Seasons Education (Cayman) Raise More Cash Easily?

Even though it seems like Four Seasons Education (Cayman) is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Companies can raise capital through either debt or equity. 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).

Four Seasons Education (Cayman) has a market capitalisation of CN¥154m and burnt through CN¥34m last year, which is 22% of the company's 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.

Is Four Seasons Education (Cayman)'s Cash Burn A Worry?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Four Seasons Education (Cayman)'s cash runway was relatively promising. 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, Four Seasons Education (Cayman) has 4 warning signs (and 1 which is significant) we think you should know about.

Of course Four Seasons Education (Cayman) 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. 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.