Yahoo Finance Here's Why We're Not Too Worried About Four Seasons Education (Cayman)'s (NYSE:FEDU) Cash Burn Situation
Just because a business does not make any money, does not mean that the stock will go down. 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 the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So should Four Seasons Education (Cayman) (NYSE:FEDU) shareholders be worried about its 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
View our latest analysis for Four Seasons Education (Cayman)
Does Four Seasons Education (Cayman) Have A Long Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at February 2023, Four Seasons Education (Cayman) had cash of CN¥492m and such minimal debt that we can ignore it for the purposes of this analysis. Importantly, its cash burn was CN¥34m over the trailing twelve months. So it had a very long cash runway of many years from February 2023. 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. The image below shows how its cash balance has been changing over the last few years.
How Well Is Four Seasons Education (Cayman) Growing?
Four Seasons Education (Cayman) managed to reduce its cash burn by 66% over the last twelve months, which suggests it's on the right flight path. In contrast, operating revenue was down 86%. Downright suboptimal! Considering both these factors, we're not particularly excited by its growth profile. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Four Seasons Education (Cayman) is building its business over time.
Can Four Seasons Education (Cayman) Raise More Cash Easily?
While Four Seasons Education (Cayman) seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. 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 and 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).
Four Seasons Education (Cayman)'s cash burn of CN¥34m is about 23% of its CN¥150m market capitalisation. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
Is Four Seasons Education (Cayman)'s Cash Burn A Worry?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Four Seasons Education (Cayman)'s cash runway was relatively promising. 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 Four Seasons Education (Cayman)'s situation. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Four Seasons Education (Cayman) (2 are a bit concerning!) that you should be aware of before investing here.
Of course Four Seasons Education (Cayman) 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.
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.
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