We can readily understand why investors are attracted to unprofitable companies. By way of example, ATA Creativity Global (NASDAQ:AACG) has seen its share price rise 150% over the last year, delighting many 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 ATA Creativity Global's 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Does ATA Creativity Global Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2021, ATA Creativity Global had CN¥91m in cash, and was debt-free. Looking at the last year, the company burnt through CN¥33m. Therefore, from June 2021 it had 2.8 years of cash runway. Arguably, that's a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.
How Well Is ATA Creativity Global Growing?
It was fairly positive to see that ATA Creativity Global reduced its cash burn by 29% during the last year. Revenue also improved during the period, increasing by 15%. On balance, we'd say the company is improving over time. In reality, this article only makes a short study of the company's growth data. You can take a look at how ATA Creativity Global has developed its business over time by checking this visualization of its revenue and earnings history.
How Hard Would It Be For ATA Creativity Global To Raise More Cash For Growth?
There's no doubt ATA Creativity Global seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.
ATA Creativity Global has a market capitalisation of CN¥556m and burnt through CN¥33m last year, which is 5.9% 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.
Is ATA Creativity Global's Cash Burn A Worry?
It may already be apparent to you that we're relatively comfortable with the way ATA Creativity Global is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Its revenue growth wasn't quite as good, but was still rather encouraging! 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. Taking a deeper dive, we've spotted 3 warning signs for ATA Creativity Global you should be aware of, and 1 of them doesn't sit too well with us.
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)
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.
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