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. 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.
So should Serko (NZSE:SKO) 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 Serko
Does Serko Have A Long Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. In March 2024, Serko had NZ$81m in cash, and was debt-free. Looking at the last year, the company burnt through NZ$5.5m. So it had a very long cash runway of many years from March 2024. Notably, however, analysts think that Serko will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.
How Well Is Serko Growing?
Serko managed to reduce its cash burn by 85% over the last twelve months, which suggests it’s on the right flight path. Pleasingly, this was achieved with the help of a 48% boost to revenue. Overall, we’d say its growth is rather impressive. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
Can Serko Raise More Cash Easily?
While Serko seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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).
Serko has a market capitalisation of NZ$433m and burnt through NZ$5.5m last year, which is 1.3% of the company’s market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
So, Should We Worry About Serko’s Cash Burn?
As you can probably tell by now, we’re not too worried about Serko’s cash burn. For example, we think its cash runway suggests that the company is on a good path. But it’s fair to say that its cash burn relative to its market cap was also very reassuring. There’s no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. Taking all the factors in this report into account, we’re not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. Taking an in-depth view of risks, we’ve identified 1 warning sign for Serko that you should be aware of before investing.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies with significant insider holdings, 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com