We're Hopeful That Four Seasons Education (Cayman) (NYSE:FEDU) Will Use Its Cash Wisely

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for Four Seasons Education (Cayman) (NYSE:FEDU) shareholders is whether they should be concerned by its rate of cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Four Seasons Education (Cayman)

How Long Is Four Seasons Education (Cayman)'s 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¥508m in cash it held at February 2022. Importantly, its cash burn was CN¥101m over the trailing twelve months. So it had a cash runway of about 5.0 years from February 2022. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. The image below shows how its cash balance has been changing over the last few years.

Is Four Seasons Education (Cayman)'s Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Four Seasons Education (Cayman) actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 11%. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Four Seasons Education (Cayman) has developed its business over time by checking this visualization of its revenue and earnings history.

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

Given its problematic fall in revenue, Four Seasons Education (Cayman) shareholders should consider how the company could fund its growth, if it turns out it needs more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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)'s cash burn of CN¥101m is about 57% of its CN¥179m market capitalisation. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.

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

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Four Seasons Education (Cayman)'s cash runway was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Four Seasons Education (Cayman)'s situation. Taking a deeper dive, we've spotted 3 warning signs for Four Seasons Education (Cayman) you should be aware of, and 2 of them are potentially serious.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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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.