We can easily understand why investors are attracted to unprofitable companies. For example, I Synergy Group (ASX:IS3) Shareholders did very well last year as the share price soared 131%. That said, unprofitable businesses are risky because they could potentially burn all their money and get into trouble.
Given its strong share price performance, we think it’s worth considering if I Synergy Group’s shareholders are concerned about its cash burn. For the purposes of this article, we will define cash burn as the amount of money the business spends each year to fund its growth (also known as negative free cash flow). The first step is to compare its cash consumption with its cash reserves, to give us its “cash trail”.
Check out our latest analysis for I Synergy Group
When could I run out of money at Synergy Group?
A company’s cash trail is calculated by dividing its cash hoard by its cash burn. When I Synergy Group last published its balance sheet in June 2021, it had no debt and cash worth A$2.7 million. Looking at last year, the company spent A$2.6 million. Therefore, as of June 2021, he had approximately 13 months of cash. While this cash trail isn’t too much of a concern, sane holders would look away and consider what would happen if the company ran out of cash. Below you can see how its liquidity has changed over time.
How is Synergy Group growing?
I Synergy Group has actually increased its cash burn by 83% over the past year, showing that it is driving investment in the business. While this in itself is concerning, the fact that operating revenue actually fell 29% over the same period makes us positively cautious. Given these two metrics, we’re a bit concerned about how the company is growing. In reality, this article only makes a short study of the company’s growth data. This chart of historical profit and revenue shows how I Synergy Group has grown its business over time.
Can I raise more money easily with Synergy Group?
I Synergy Group’s revenues are down and its cash burn is increasing, so many may be considering its need to raise more cash in the future. Companies can raise capital either through debt or equity. One of the main advantages of publicly traded companies is that they can sell shares to investors to raise funds and finance their growth. By comparing a company’s annual cash burn to its total market capitalization, we can roughly estimate how many shares it would need to issue to keep the company running for another year (at the same burn rate).
I Synergy Group’s cash burn of A$2.6 million represents approximately 7.8% of its market capitalization of A$33 million. Since this is a rather small percentage, it would probably be very easy for the company to finance another year’s growth by issuing new shares to investors, or even taking out a loan.
So should we be worried about I Synergy Group’s cash burn?
Even though its growing cash burn makes us a little nervous, we are bound to mention that we think I Synergy Group’s cash burn relative to its market capitalization is relatively promising. We don’t think its cash burn is particularly problematic, but after considering the range of factors discussed in this article, we think shareholders should monitor its evolution over time. On a different note, we conducted a thorough investigation of the company and identified 5 warning signs for I Synergy Group (3 make us uncomfortable!) that you should be aware of before investing here.
If you prefer to consult another company with better fundamentals, do not miss this free list of interesting companies, which have a high return on equity and low debt or this list of stocks which should all grow.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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