We're Not Very Worried About SECOS Group's (ASX:SES) Cash Burn Rate

We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should SECOS Group (ASX:SES) shareholders 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'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for SECOS Group

When Might SECOS Group Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at June 2022, SECOS Group had cash of AU$4.1m and no debt. In the last year, its cash burn was AU$6.5m. That means it had a cash runway of around 8 months as of June 2022. Importantly, the one analyst we see covering the stock thinks that SECOS Group will reach cashflow breakeven in around 9 months. So there's a very good chance it won't need more cash, when you consider the burn rate will be reducing in that period. You can see how its cash balance has changed over time in the image below.

How Well Is SECOS Group Growing?

At first glance it's a bit worrying to see that SECOS Group actually boosted its cash burn by 11%, year on year. The revenue growth of 3.2% gives a ray of hope, at the very least. In light of the data above, we're fairly sanguine about the business growth trajectory. 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 SECOS Group To Raise More Cash For Growth?

Since SECOS Group has been boosting its cash burn, the market will likely be considering how it can raise more cash if need be. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

SECOS Group's cash burn of AU$6.5m is about 8.1% of its AU$80m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

How Risky Is SECOS Group's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way SECOS Group is burning through its cash. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. Although we do find its cash runway to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. There's no doubt that shareholders can take a lot of heart from the fact that at least one analyst is forecasting it will reach breakeven before too long. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for SECOS Group that investors should know when investing in the stock.

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)

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here