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Trailing twelve-month data shows us that China Best Group Holding Limited's (HKG:370) earnings loss has accumulated to -HK$94.5m. Although some investors expected this, their belief in the path to profitability for China Best Group Holding may be wavering. The single most important question to ask when you’re investing in a loss-making company is – will it need to raise cash again, and if so, when? Selling new shares may dilute the value of existing shares on issue, and since China Best Group Holding is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Looking at China Best Group Holding’s latest financial data, I will estimate when the company may run out of cash and need to raise more money.
See our latest analysis for China Best Group Holding
What is cash burn?
Currently, China Best Group Holding has HK$133m in cash holdings and producing negative free cash flow of -HK$77.6m. The riskiest factor facing investors of China Best Group Holding is the potential for the company to run out of cash without the ability to raise more money. China Best Group Holding operates in the distributors industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. China Best Group Holding faces the trade-off between running the risk of depleting its cash reserves too fast, or risk falling behind its profitable competitors by investing too slowly.
When will China Best Group Holding need to raise more cash?
We can measure China Best Group Holding's ongoing cash expenditure requirements by looking at free cash flow, which I define as cash flow from operations minus fixed capital investment, is a measure of how much cash a company generates/loses each year.
Free cash outflows grew by 120% over the past year, up sharply on the prior year. My cash burn analysis suggests that China Best Group Holding has a cash runway of 1.7 years, given its current level of cash holdings. This may mean it will be raising new funds sooner than shareholders would like. Though, if China Best Group Holding keeps its free cash outflow level at -HK$77.6m, it could still need to raise new capital within the next couple of years. Although this is a relatively simplistic calculation, and China Best Group Holding could reduce its costs or borrow money instead of raising new equity capital, the outcome of this analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.