Here's Why We're Watching MOGU's (NYSE:MOGU) Cash Burn Situation

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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for MOGU (NYSE:MOGU) 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. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for MOGU

How Long Is MOGU's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When MOGU last reported its balance sheet in September 2020, it had zero debt and cash worth CN¥802m. Importantly, its cash burn was CN¥295m over the trailing twelve months. So it had a cash runway of about 2.7 years from September 2020. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.

How Well Is MOGU Growing?

Some investors might find it troubling that MOGU is actually increasing its cash burn, which is up 47% in the last year. Also concerning, operating revenue was actually down by 44% in that time. Considering both these metrics, we're a little concerned about how the company is developing. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Hard Would It Be For MOGU To Raise More Cash For Growth?

Even though it seems like MOGU 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 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.

MOGU has a market capitalisation of CN¥1.7b and burnt through CN¥295m last year, which is 17% of the company's market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

Is MOGU's Cash Burn A Worry?

On this analysis of MOGU's cash burn, we think its cash runway was reassuring, while its falling revenue has us a bit worried. 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. Taking a deeper dive, we've spotted 2 warning signs for MOGU you should be aware of, and 1 of them makes us a bit uncomfortable.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, 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. 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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