There’s no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should China 33 Media Group (HKG:8087) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
How Long Is China 33 Media Group’s Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. When China 33 Media Group last reported its balance sheet in June 2019, it had zero debt and cash worth CN¥30m. In the last year, its cash burn was CN¥3.1m. Therefore, from June 2019 it had 9.8 years of cash runway. Even though this is but one measure of the company’s cash burn, the thought of such a long cash runway warms our bellies in a comforting way. Depicted below, you can see how its cash holdings have changed over time.
Is China 33 Media Group’s Revenue Growing?
We’re hesitant to extrapolate on the recent trend to assess its cash burn, because China 33 Media Group actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Although it’s hardly brilliant growth, it’s good to see the company grew revenue by 4.8% in the last year. Of course, we’ve only taken a quick look at the stock’s growth metrics, here. You can take a look at how China 33 Media Group has developed its business over time by checking this visualization of its revenue and earnings history.
How Hard Would It Be For China 33 Media Group To Raise More Cash For Growth?
Notwithstanding China 33 Media Group’s revenue growth, it is still important to consider how it could raise more money, if it needs to. 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 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).
China 33 Media Group has a market capitalisation of CN¥92m and burnt through CN¥3.1m last year, which is 3.4% of the company’s market value. That’s a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
How Risky Is China 33 Media Group’s Cash Burn Situation?
As you can probably tell by now, we’re not too worried about China 33 Media Group’s cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. On this analysis its revenue growth was its weakest feature, but we are not concerned about it. After taking into account the various metrics mentioned in this report, we’re pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. We think it’s very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what China 33 Media Group’s CEO gets paid each year.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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. Thank you for reading.