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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, SPARQ Systems (CVE:SPRQ) stock is up 159% 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.
In light of its strong share price run, we think now is a good time to investigate how risky SPARQ Systems' cash burn is. 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.
Does SPARQ Systems Have A Long Cash Runway?
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 September 2024, SPARQ Systems had cash of CA$7.4m and no debt. Importantly, its cash burn was CA$5.0m over the trailing twelve months. That means it had a cash runway of around 18 months as of September 2024. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.
See our latest analysis for SPARQ Systems
How Is SPARQ Systems' Cash Burn Changing Over Time?
In our view, SPARQ Systems doesn't yet produce significant amounts of operating revenue, since it reported just CA$362k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. As it happens, the company's cash burn reduced by 9.0% over the last year, which suggests that management are maintaining a fairly steady rate of business development, albeit with a slight decrease in spending. Admittedly, we're a bit cautious of SPARQ Systems due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
Can SPARQ Systems Raise More Cash Easily?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for SPARQ Systems to raise more cash in the future. 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 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).