We Think Suntar Eco-City (SGX:BKZ) Can Afford To Drive Business Growth
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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for Suntar Eco-City (SGX:BKZ) shareholders is whether they should be concerned by its rate of 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
View our latest analysis for Suntar Eco-City
When Might Suntar Eco-City Run Out Of Money?
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. In December 2019, Suntar Eco-City had CN¥81m in cash, and was debt-free. Importantly, its cash burn was CN¥545k over the trailing twelve months. That means it had a cash runway of very many years as of December 2019. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. Depicted below, you can see how its cash holdings have changed over time.
Is Suntar Eco-City's Revenue Growing?
We're hesitant to extrapolate on the recent trend to assess its cash burn, because Suntar Eco-City actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Sadly, operating revenue actually dropped like a stone in the last twelve months, falling 91%, which is rather concerning. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Suntar Eco-City is building its business over time.
How Hard Would It Be For Suntar Eco-City To Raise More Cash For Growth?
Given its problematic fall in revenue, Suntar Eco-City shareholders should consider how the company could fund its growth, if it turns out it needs more cash. 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 to 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).
Suntar Eco-City's cash burn of CN¥545k is about 0.5% of its CN¥102m market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
How Risky Is Suntar Eco-City's Cash Burn Situation?
As you can probably tell by now, we're not too worried about Suntar Eco-City's cash burn. For example, we think its cash runway suggests that the company is on a good path. Although we do find its falling revenue to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. 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. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Suntar Eco-City (of which 2 are concerning!) you should know about.
Of course Suntar Eco-City may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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