Just because a business does not make any money, does not mean that the stock will go down. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So, the natural question for Wealth Glory Holdings (HKG:8269) 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.
How Long Is Wealth Glory Holdings’ 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. As at September 2021, Wealth Glory Holdings had cash of HK$20m and no debt. Importantly, its cash burn was HK$17m over the trailing twelve months. That means it had a cash runway of around 15 months as of September 2021. That’s not too bad, but it’s fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. The image below shows how its cash balance has been changing over the last few years.
How Well Is Wealth Glory Holdings Growing?
Wealth Glory Holdings reduced its cash burn by 9.1% during the last year, which points to some degree of discipline. But the revenue dip of 11% in the same period was a bit concerning. In light of the data above, we’re fairly sanguine about the business growth trajectory. Of course, we’ve only taken a quick look at the stock’s growth metrics, here. You can take a look at how Wealth Glory Holdings has developed its business over time by checking this visualization of its revenue and earnings history.
How Hard Would It Be For Wealth Glory Holdings To Raise More Cash For Growth?
Even though it seems like Wealth Glory Holdings is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. By comparing a company’s annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Wealth Glory Holdings’ cash burn of HK$17m is about 10% of its HK$162m market capitalisation. Given that situation, it’s fair to say the company wouldn’t have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
So, Should We Worry About Wealth Glory Holdings’ Cash Burn?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Wealth Glory Holdings’ cash burn relative to its market cap was relatively promising. Even though we don’t think it has a problem with its cash burn, the analysis we’ve done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. On another note, Wealth Glory Holdings has 3 warning signs (and 1 which shouldn’t be ignored) we think you should know about.
Of course Wealth Glory Holdings may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.