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We can readily understand why investors are attracted to unprofitable companies. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So, the natural question for Alpha Professional Holdings (HKG:948) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Check out our latest analysis for Alpha Professional Holdings
Does Alpha Professional Holdings Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2019, Alpha Professional Holdings had cash of HK$748k and no debt. Importantly, its cash burn was HK$29m over the trailing twelve months. So it seems to us it had a cash runway of less than two months from September 2019. It's 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.
How Well Is Alpha Professional Holdings Growing?
Some investors might find it troubling that Alpha Professional Holdings is actually increasing its cash burn, which is up 8.8% in the last year. And we must say we find it concerning that operating revenue dropped 7.4% over the same period. In light of the data above, we're fairly sanguine about the business growth trajectory. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Alpha Professional Holdings has developed its business over time by checking this visualization of its revenue and earnings history.
How Easily Can Alpha Professional Holdings Raise Cash?
Since Alpha Professional Holdings's revenue is down, and its cash burn is up, shareholders would quite reasonably be considering whether it can raise more money easily, 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. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.