There’s no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So, the natural question for Hifood Group Holdings (HKG:442) shareholders is whether they should be concerned by its rate of 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. Let’s start with an examination of the business’s cash, relative to its cash burn.
Does Hifood Group Holdings Have A Long Cash Runway?
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 March 2019, Hifood Group Holdings had cash of HK$271m and no debt. Importantly, its cash burn was HK$4.9m over the trailing twelve months. That means it had a cash runway of very many years as of March 2019. 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. The image below shows how its cash balance has been changing over the last few years.
Is Hifood Group Holdings’s Revenue Growing?
Given that Hifood Group Holdings actually had positive free cash flow last year, before burning cash this year, we’ll focus on its operating revenue to get a measure of the business trajectory. Regrettably, the company’s operating revenue moved in the wrong direction over the last twelve months, declining by 49%. Of course, we’ve only taken a quick look at the stock’s growth metrics, here. You can take a look at how Hifood Group Holdings has developed its business over time by checking this visualization of its revenue and earnings history.
Can Hifood Group Holdings Raise More Cash Easily?
Given its problematic fall in revenue, Hifood Group Holdings shareholders should consider how the company could fund its growth, if it turns out it needs more cash. Companies can raise capital through either debt or equity. 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.
Hifood Group Holdings’s cash burn of HK$4.9m is about 1.7% of its HK$293m market capitalisation. So it could almost certainly just borrow a little to fund another year’s growth, or else easily raise the cash by issuing a few shares.
Is Hifood Group Holdings’s Cash Burn A Worry?
It may already be apparent to you that we’re relatively comfortable with the way Hifood Group Holdings is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Although we do find its falling revenue to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. Looking at all the measures in this article, together, we’re not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Hifood Group Holdings CEO is paid..
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 email@example.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.