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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 CEFC Hong Kong Financial Investment (HKG:1520) shareholders is whether they should be concerned by its rate of cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
See our latest analysis for CEFC Hong Kong Financial Investment
Does CEFC Hong Kong Financial Investment Have A Long Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In June 2019, CEFC Hong Kong Financial Investment had HK$123m in cash, and was debt-free. In the last year, its cash burn was HK$18m. Therefore, from June 2019 it had 6.8 years of cash runway. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.
How Well Is CEFC Hong Kong Financial Investment Growing?
Happily, CEFC Hong Kong Financial Investment is travelling in the right direction when it comes to its cash burn, which is down 80% over the last year. But it was a bit disconcerting to see operating revenue down 30% in that time. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. In reality, this article only makes a short study of the company's growth data. You can take a look at how CEFC Hong Kong Financial Investment has developed its business over time by checking this visualization of its revenue and earnings history.
How Easily Can CEFC Hong Kong Financial Investment Raise Cash?
We are certainly impressed with the progress CEFC Hong Kong Financial Investment has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash to drive 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.