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Will Crossword Cybersecurity (LON:CCS) Spend Its Cash Wisely?

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. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. 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, the natural question for Crossword Cybersecurity (LON:CCS) shareholders is whether they should be concerned by its rate of 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'.

See our latest analysis for Crossword Cybersecurity

How Long Is Crossword Cybersecurity's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Crossword Cybersecurity last reported its balance sheet in June 2019, it had zero debt and cash worth UK£1.3m. In the last year, its cash burn was UK£2.3m. Therefore, from June 2019 it had roughly 7 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. The image below shows how its cash balance has been changing over the last few years.

AIM:CCS Historical Debt, November 11th 2019
AIM:CCS Historical Debt, November 11th 2019

How Well Is Crossword Cybersecurity Growing?

Crossword Cybersecurity actually ramped up its cash burn by a whopping 56% in the last year, which shows it is boosting investment in the business. On the bright side, at least operating revenue was up 24% over the same period, giving some cause for hope. Considering both these factors, we're not particularly excited by its growth profile. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can Crossword Cybersecurity Raise More Cash Easily?

Since Crossword Cybersecurity 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. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to 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.

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Crossword Cybersecurity's cash burn of UK£2.3m is about 10% of its UK£22m market capitalisation. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

Is Crossword Cybersecurity's Cash Burn A Worry?

On this analysis of Crossword Cybersecurity's cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway has us a bit worried. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. We think it's very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what Crossword Cybersecurity's CEO gets paid each year.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.