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Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we'd take a look at whether Fortune Sun (China) Holdings (HKG:352) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business's cash, relative to its cash burn.
See our latest analysis for Fortune Sun (China) Holdings
When Might Fortune Sun (China) 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. As at June 2019, Fortune Sun (China) Holdings had cash of CN¥36m and no debt. Looking at the last year, the company burnt through CN¥8.5m. So it had a cash runway of about 4.2 years from June 2019. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.
How Well Is Fortune Sun (China) Holdings Growing?
It was fairly positive to see that Fortune Sun (China) Holdings reduced its cash burn by 47% during the last year. But the revenue dip of 33% in the same period was a bit concerning. Considering both these factors, we're not particularly excited by its growth profile. In reality, this article only makes a short study of the company's growth data. You can take a look at how Fortune Sun (China) Holdings has developed its business over time by checking this visualization of its revenue and earnings history.
How Hard Would It Be For Fortune Sun (China) Holdings To Raise More Cash For Growth?
While Fortune Sun (China) Holdings seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.
Since it has a market capitalisation of HK$133m, Fortune Sun (China) Holdings's CN¥8.5m in cash burn equates to about 7.0% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.