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There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. 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 Guru Online (Holdings) (HKG:8121) 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. 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 Guru Online (Holdings)
When Might Guru Online (Holdings) Run Out Of Money?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Guru Online (Holdings) last reported its balance sheet in September 2019, it had zero debt and cash worth HK$25m. Looking at the last year, the company burnt through HK$13m. So it had a cash runway of approximately 22 months from September 2019. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Guru Online (Holdings) Growing?
Happily, Guru Online (Holdings) is travelling in the right direction when it comes to its cash burn, which is down 67% over the last year. However, operating revenue growth was flat over the period. We think it is growing rather well, upon reflection. In reality, this article only makes a short study of the company's growth data. You can take a look at how Guru Online (Holdings) has developed its business over time by checking this visualization of its revenue and earnings history.
How Hard Would It Be For Guru Online (Holdings) To Raise More Cash For Growth?
Guru Online (Holdings) seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Companies can raise capital through either debt or equity. 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.