Just because a business isn’t making money doesn’t mean the stock will go down. For example, biotech and mineral exploration companies often lose money for years before they are successful with a new treatment or mineral discovery. Still, only an idiot would ignore the risk that a loss-making company would burn up its cash too quickly.
In view of this risk, we thought to examine whether Savor Eat (TLV: SVRT) shareholders should be concerned about its consumption of cash. For the purposes of this article, we’ll define cash consumption as the amount of cash the business spends each year to finance its growth (also known as negative free cash flow). Let’s start with a review of the company’s cash flow, relative to its cash consumption.
Check out our latest review for SavorEat
When could SavourEat run out of money?
You can calculate a company’s cash flow trail by dividing the amount of cash it has by the rate at which it spends that cash. When SavorEat last published its balance sheet in June 2021, it had no debt and cash worth 50 million yen. In the past year, his cash consumption was 8.9 million yen. So he had a cash flow trail of around 5.6 years from June 2021. While this is only a measure of his cash flow situation, it certainly gives us the impression that holders have nothing to fear. Pictured below, you can see how his cash holdings have changed over time.
Can SavorEat collect more money easily?
Businesses can raise capital through debt or equity. Many companies end up issuing new shares to finance their future growth. By comparing a company’s annual cash consumption to its total market capitalization, we can roughly estimate how many shares it would need to issue to keep the business running for another year (at the same burn rate).
Since it has a market cap of 138 million yen, SavorEat’s cash consumption of 8.9 million yen is equivalent to about 6.4% of its market value. Given that this is a rather small percentage, it would probably be very easy for the company to finance the growth of another year by issuing new shares to investors, or even taking out a loan.
Is SavorEat’s money consumption a concern?
Because SavorEat is a start-up company, we don’t have a lot of data on which to form an opinion on its cash consumption. We would probably be more comfortable if he had reported operating income. However, it’s fair to say that his cash trail has taken some comfort to us. In summary, his cash consumption doesn’t bother us and we’re excited to see what kind of growth he can achieve with his current cash flow. Separately, we examined different risks affecting the business and identified 3 warning signs for SavourEat (1 of which is a bit disturbing!) that you should know about.
Sure, you might find a fantastic investment looking elsewhere. So take a look at this free list of interesting companies, and this list of growth stocks (according to analysts’ forecasts)
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.