We’re not worried about ScandiDos (STO:SDOS) losing cash.
5 mins read

We’re not worried about ScandiDos (STO:SDOS) losing cash.

We can easily understand why investors are attracted to unprofitable companies. For example, even though software-as-a-service company Salesforce.com lost money for years while generating recurring revenue, if you had owned the stock since 2005, you would have done very well indeed. However, only a fool would ignore the risk of a loss-making company burning through its cash too quickly.

It should be ScandiDos (STO:SDOS) shareholders will worry about losing cash? For the purposes of this article, we’ll define cash burn as the amount of cash a company spends each year to fund its growth (also called negative free cash flow). We’ll start by comparing your cash burn with your cash reserves to calculate your cash runway.

View our latest analysis for ScandiDos

Does ScandiDos have a long cash runway?

A company’s cash reserve is calculated by dividing its cash holdings by its cash burn. ScandiDos has so little debt that we’ll put it aside and focus on the KRW 12m in cash it had as of October 2019. Looking at the last year, the company paid down KRW 15m. Therefore, as of October 2019, it had approximately 9 months of cash runway. However, it is worth noting that the only analyst covering the company’s stock believes that ScandiDos will break even sooner (at free cash flow levels). If this happens, the length of the cash runway will become a moot point today. In the image below you can see how your cash balance has changed over time.

OM:SDOS Historical Debt, January 16, 2020OM:SDOS Historical Debt, January 16, 2020

OM:SDOS Historical Debt, January 16, 2020

How well does ScandiDos grow?

Over the last year, ScandiDos has reduced its cash burn by 12%, indicating some degree of discipline. Considering that the company’s operating revenue grew 26% during this period, this is great to see. Considering the above factors, the company doesn’t do too badly when it comes to assessing how it’s changing over time. While the past is always worth studying, the future is what matters most. For this reason, it is worth taking a look at our analysts’ forecasts for the company.

Can ScandiDos easily raise more cash?

ScandiDos appears to be in a fairly good position in terms of its cash burn, but we still think it’s worth considering how easily it could raise more money if it wanted to. Generally speaking, a publicly traded company can raise new cash by issuing shares or taking on debt. Many companies end up issuing new shares to finance future growth. By comparing a company’s annual cash burn with its total market capitalization, we can roughly estimate how many shares it would need to issue to run the company for another year (at the same burn rate).

ScandiDos has a market capitalization of 163 million kr, and last year it burned 15 million kr, which is 9.3% of the company’s market value. That’s a low percentage, so we think the company would be able to raise more money to fund growth with little dilution, or even just borrow some money.

So should we worry about losing cash at ScandiDos?

It may already be obvious to you that we are relatively happy with the way ScandiDos wastes its money. For example, we think its cash burn relative to market capitalization suggests the company is on the right track. While the cash runway gives us reason to pause, the other metrics discussed in this article paint an overall positive picture. It’s definitely very positive that at least one analyst is forecasting that the company will break even soon. Looking at all the measures described in this article, we are not concerned about the cash burn rate, which appears to be under control. For us, it is always important to consider the risks associated with the cash burn rate. However, investors should consider a range of factors when looking for new stocks. For example, it might be interesting to see how much total compensation the CEO of ScandiDos receives.

Of course, you can find a fantastic investment by looking elsewhere. So take a look at this free list of companies that insiders are buying and this list of growth stocks (according to analyst forecasts)

If you notice an error that requires correction, please contact the editor at [email protected]. This article by Simply Wall St is of a general nature. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Simply Wall St has no position in the stocks mentioned.

Our goal is to provide long-term, focused research analysis based on primary data. Please note that our analysis may not reflect the latest price-sensitive company announcements or qualitative content. Thank you for reading.