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Just because a business does not make any money, does not mean that the stock will go down. 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 should Sosandar (LON:SOS) shareholders be worried about its cash burn? 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.
View our latest analysis for Sosandar
How Long Is Sosandar's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at March 2022, Sosandar had cash of UK£7.0m and no debt. In the last year, its cash burn was UK£2.3m. Therefore, from March 2022 it had 3.0 years of cash runway. Notably, however, the one analyst we see covering the stock thinks that Sosandar will break even (at a free cash flow level) before then. If that happens, then the length of its cash runway, today, would become a moot point. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Sosandar Growing?
Sosandar actually ramped up its cash burn by a whopping 75% in the last year, which shows it is boosting investment in the business. It seems likely that the vociferous operating revenue growth of 142% during that time may well have given management confidence to ramp investment. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. 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 Sosandar Raise More Cash Easily?
We are certainly impressed with the progress Sosandar has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.
Sosandar has a market capitalisation of UK£45m and burnt through UK£2.3m last year, which is 5.1% of the company's market value. 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.