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.

CEFC Hong Kong Financial Investment has a market capitalisation of HK$110m and burnt through HK$18m last year, which is 16% of the company's market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

How Risky Is CEFC Hong Kong Financial Investment's Cash Burn Situation?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought CEFC Hong Kong Financial Investment's cash runway was relatively promising. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. For us, it's always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the CEFC Hong Kong Financial Investment CEO receives in total remuneration.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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.

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. Thank you for reading.