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Here's Why We're Not Too Worried About ATA Creativity Global's (NASDAQ:AACG) Cash Burn Situation

·3 min read

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should ATA Creativity Global (NASDAQ:AACG) 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'. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for ATA Creativity Global

How Long Is ATA Creativity Global's 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. When ATA Creativity Global last reported its balance sheet in December 2021, it had zero debt and cash worth CN¥71m. Importantly, its cash burn was CN¥36m over the trailing twelve months. So it had a cash runway of about 2.0 years from December 2021. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
debt-equity-history-analysis

How Well Is ATA Creativity Global Growing?

Some investors might find it troubling that ATA Creativity Global is actually increasing its cash burn, which is up 11% in the last year. The good news is that operating revenue increased by 25% in the last year, indicating that the business is gaining some traction. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing 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?

ATA Creativity Global seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. 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. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

ATA Creativity Global's cash burn of CN¥36m is about 18% of its CN¥200m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

How Risky Is ATA Creativity Global's Cash Burn Situation?

On this analysis of ATA Creativity Global's cash burn, we think its revenue growth was reassuring, while its increasing cash burn has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about ATA Creativity Global's situation. Separately, we looked at different risks affecting the company and spotted 3 warning signs for ATA Creativity Global (of which 1 is a bit concerning!) you should know about.

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)

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.