Yahoo Finance We're Keeping An Eye On HSC Technology Group's (ASX:HSC) Cash Burn Rate
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. Indeed, HSC Technology Group (ASX:HSC) stock is up 240% in the last year, providing strong gains for shareholders. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
Given its strong share price performance, we think it's worthwhile for HSC Technology Group shareholders to consider whether its cash burn is concerning. 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for HSC Technology Group
Does HSC Technology Group 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. As at June 2020, HSC Technology Group had cash of AU$2.0m and no debt. Looking at the last year, the company burnt through AU$2.5m. So it had a cash runway of approximately 10 months from June 2020. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. The image below shows how its cash balance has been changing over the last few years.
How Is HSC Technology Group's Cash Burn Changing Over Time?
In our view, HSC Technology Group doesn't yet produce significant amounts of operating revenue, since it reported just AU$2.2m in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Given the length of the cash runway, we'd interpret the 53% reduction in cash burn, in twelve months, as prudent if not necessary for capital preservation. In reality, this article only makes a short study of the company's growth data. You can take a look at how HSC Technology Group is growing revenue over time by checking this visualization of past revenue growth.
How Hard Would It Be For HSC Technology Group To Raise More Cash For Growth?
There's no doubt HSC Technology Group's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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.
Since it has a market capitalisation of AU$31m, HSC Technology Group's AU$2.5m in cash burn equates to about 8.1% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
So, Should We Worry About HSC Technology Group's Cash Burn?
On this analysis of HSC Technology Group's cash burn, we think its cash burn reduction was reassuring, while its cash runway has us a bit worried. 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. On another note, HSC Technology Group has 6 warning signs (and 2 which are concerning) we think you should know about.
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)
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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