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China E-Information Technology Group Limited (HKG:8055) continues its loss-making streak, announcing negative earnings for its latest financial year ending. Savvy investors should always reassess the situation of loss-making companies frequently, and keep informed about whether or not these businesses are in a strong cash position. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that China E-Information Technology Group is spending more money than it earns, it will need to fund its expenses via external sources of capital. Today I’ve examined China E-Information Technology Group’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital.
What is cash burn?
Currently, China E-Information Technology Group has HK$98m in cash holdings and producing negative free cash flow of -HK$44.1m. The riskiest factor facing investors of China E-Information Technology Group is the potential for the company to run out of cash without the ability to raise more money. China E-Information Technology Group operates in the education services industry, which delivered positive earnings in the past year. This means, on average, its industry peers are profitable. China E-Information Technology Group runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.
When will China E-Information Technology Group need to raise more cash?
One way to measure the cost to China E-Information Technology Group of keeping the business running, is by using free cash flow (which I define as cash flow from operations minus fixed capital investment).
Over the last twelve months, free cash outflows (excluding one-offs) increased by 55%, up sharply on the prior year. Though, my cash burn analysis suggests that China E-Information Technology Group has a cash runway of over three years, with its current level of cash holdings. This means the company’s expenditure can continue to grow at the same rate without having to raise capital in the near future. Although this is a relatively simplistic calculation, and China E-Information Technology Group could reduce its costs or borrow money instead of raising new equity capital, this analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.
Next Steps:Although China E-Information Technology Group’s cash burn is growing at a double-digit rate, investors can breathe easy knowing it probably won’t be raising money any time soon. This should be good news for current shareholders as there is less of a chance that their current shares will be diluted, and it also indicates the company doesn’t have an immediate cash problem on its hand. However, this analysis still doesn’t tell us when China E-Information Technology Group will become breakeven. I suggest you take a look at their expected revenue growth to determine the timing of future profitability as well. Keep in mind I haven’t considered other factors such as how 8055 is expected to perform in the future. I recommend you continue to research China E-Information Technology Group to get a more holistic view of the company by looking at:
- Valuation: What is 8055 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 8055 is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on China E-Information Technology Group’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 31 March 2019. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.
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