Yahoo Finance 17 Education & Technology Group (NASDAQ:YQ) Will Have To Spend Its Cash Wisely
There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we'd take a look at whether 17 Education & Technology Group (NASDAQ:YQ) shareholders should be worried about its cash burn. 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'.
Check out our latest analysis for 17 Education & Technology Group
When Might 17 Education & Technology Group 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. In December 2021, 17 Education & Technology Group had CN¥1.2b in cash, and was debt-free. In the last year, its cash burn was CN¥1.6b. Therefore, from December 2021 it had roughly 9 months of cash runway. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. You can see how its cash balance has changed over time in the image below.
How Well Is 17 Education & Technology Group Growing?
Notably, 17 Education & Technology Group actually ramped up its cash burn very hard and fast in the last year, by 167%, signifying heavy investment in the business. While that certainly gives us pause for thought, we take a lot of comfort in the strong annual revenue growth of 69%. In light of the data above, we're fairly sanguine about the business growth trajectory. In reality, this article only makes a short study of the company's growth data. You can take a look at how 17 Education & Technology Group is growing revenue over time by checking this visualization of past revenue growth.
Can 17 Education & Technology Group Raise More Cash Easily?
Since 17 Education & Technology Group has been boosting its cash burn, the market will likely be considering how it can raise more cash if need be. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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.
Since it has a market capitalisation of CN¥748m, 17 Education & Technology Group's CN¥1.6b in cash burn equates to about 219% of its market value. Given just how high that expenditure is, relative to the company's market value, we think there's an elevated risk of funding distress, and we would be very nervous about holding the stock.
So, Should We Worry About 17 Education & Technology Group's Cash Burn?
On this analysis of 17 Education & Technology Group's cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap has us a bit worried. After considering the data discussed in this article, we don't have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon. Taking a deeper dive, we've spotted 3 warning signs for 17 Education & Technology Group you should be aware of, and 1 of them shouldn't be ignored.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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.
