Yahoo Finance Will East 33 (ASX:E33) Spend 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, 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.Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So, the natural question for East 33 ( ASX:E33 ) shareholders is whether they should be concerned by its rate of 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.
See our latest analysis for East 33
How Long Is East 33's 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.As at December 2021, East 33 had cash of AU$5.5m and such minimal debt that we can ignore it for the purposes of this analysis.Looking at the last year, the company burnt through AU$4.6m.That means it had a cash runway of around 15 months as of December 2021.That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically.Importantly, if we extrapolate recent cash burn trends, the cash runway would be noticeably longer.You can see how its cash balance has changed over time in the image below.
How Well Is East 33 Growing?
East 33 boosted investment sharply in the last year, with cash burn ramping by 70%.While that isa little concerning at a glance, the company has a track record of recent growth, evidenced by the impressive 80% growth in revenue, over the very same year. On balance, we'd say the company is improving over time. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company .
Can East 33 Raise More Cash Easily?
Even though it seems like East 33 is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth.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.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.
East 33's cash burn of AU$4.6m is about 24% of its AU$19m market capitalisation.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.
How Risky Is East 33's Cash Burn Situation?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought East 33's revenue growth was relatively promising.Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. An in-depth examination of risks revealed 3 warning signs for East 33 that readers should think about before committing capital to this stock.
Of course East 33 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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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.
