We're Not Worried About iCandy Interactive's (ASX:ICI) Cash Burn
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. Indeed, iCandy Interactive (ASX:ICI) stock is up 443% in the last year, providing strong gains for shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
In light of its strong share price run, we think now is a good time to investigate how risky iCandy Interactive's cash burn is. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; 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 iCandy Interactive
When Might iCandy Interactive 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. As at December 2020, iCandy Interactive had cash of AU$13m and such minimal debt that we can ignore it for the purposes of this analysis. Importantly, its cash burn was AU$1.6m over the trailing twelve months. So it had a cash runway of about 8.2 years from December 2020. 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. You can see how its cash balance has changed over time in the image below.
How Well Is iCandy Interactive Growing?
Some investors might find it troubling that iCandy Interactive is actually increasing its cash burn, which is up 35% in the last year. But looking on the bright side, its revenue gained by 62%, lending some credence to the growth narrative. Of course, with spend going up shareholders will want to see fast growth continue. It seems to be growing nicely. In reality, this article only makes a short study of the company's growth data. This graph of historic revenue growth shows how iCandy Interactive is building its business over time.
Can iCandy Interactive Raise More Cash Easily?
While iCandy Interactive seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.
iCandy Interactive's cash burn of AU$1.6m is about 2.3% of its AU$71m market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.
Is iCandy Interactive's Cash Burn A Worry?
It may already be apparent to you that we're relatively comfortable with the way iCandy Interactive is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. 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 iCandy Interactive (2 are a bit unpleasant!) that you should be aware of before investing here.
Of course iCandy Interactive 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.
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. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
