We Think SPARQ Systems (CVE:SPRQ) Can Afford To Drive Business Growth

editorial-team@simplywallst.com (Simply Wall St)

Sun, Sep 8, 2024, 6:17 AM 4 min read

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. By way of example, SPARQ Systems (CVE:SPRQ) has seen its share price rise 533% over the last year, delighting many shareholders. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given its strong share price performance, we think it's worthwhile for SPARQ Systems 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for SPARQ Systems

When Might SPARQ Systems Run Out Of Money?

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. When SPARQ Systems last reported its June 2024 balance sheet in August 2024, it had zero debt and cash worth CA$9.7m. Importantly, its cash burn was CA$4.0m over the trailing twelve months. That means it had a cash runway of about 2.4 years as of June 2024. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis — TSXV:SPRQ Debt to Equity History September 8th 2024

How Is SPARQ Systems' Cash Burn Changing Over Time?

Whilst it's great to see that SPARQ Systems has already begun generating revenue from operations, last year it only produced CA$1.4k, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 26% over the last year suggests some degree of prudence. SPARQ Systems makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Easily Can SPARQ Systems Raise Cash?

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. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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).

SPARQ Systems has a market capitalisation of CA$88m and burnt through CA$4.0m last year, which is 4.5% of the company's 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 SPARQ Systems' Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way SPARQ Systems is burning through its cash. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. And even though its cash burn reduction wasn't quite as impressive, it was still a positive. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for SPARQ Systems (3 are significant!) that you should be aware of before investing here.

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)

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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.