Theres no doubt that money can be made by owning shares of unprofitable businesses. 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 Sealand Capital Galaxy (LON:SCGL) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Lets start with an examination of the businesss cash, relative to its cash burn.

See our latest analysis for Sealand Capital Galaxy

You can calculate a companys cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at June 2019, Sealand Capital Galaxy had cash of UK62k and no debt. In the last year, its cash burn was UK478k. So it had a cash runway of approximately 2 months from June 2019. Its extremely surprising to us that the company has allowed its cash runway to get that short! You can see how its cash balance has changed over time in the image below.

Whilst its great to see that Sealand Capital Galaxy has already begun generating revenue from operations, last year it only produced UK587k, so we dont think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis well focus on how the cash burn is tracking. Wed venture that the 68% reduction in cash burn over the last year shows that management are, at least, mindful of its ongoing need for cash. Sealand Capital Galaxy makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.

Theres no doubt Sealand Capital Galaxys rapidly reducing cash burn brings comfort, but even if its only hypothetical, its always worth asking how easily it could raise more money to fund further growth. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash to drive growth. We can compare a companys cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one years operations.

Sealand Capital Galaxy has a market capitalisation of UK2.0m and burnt through UK478k last year, which is 24% of the companys market value. Thats not insignificant, and if the company had to sell enough shares to fund another years growth at the current share price, youd likely witness fairly costly dilution.

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Sealand Capital Galaxys cash burn reduction was relatively promising. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Sealand Capital Galaxy (4 cant be ignored!) that you should be aware of before investing here.

Of course Sealand Capital Galaxy 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.

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.

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. Thank you for reading.

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Heres Why Sealand Capital Galaxy (LON:SCGL) Must Use Its Cash Wisely - Simply Wall St