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. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
Given this risk, we thought we’d take a look at whether China 33 Media Group (HKG:8087) shareholders should be worried about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for China 33 Media Group
Does China 33 Media Group Have A Long 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. In December 2019, China 33 Media Group had CN¥21m in cash, and was debt-free. Importantly, its cash burn was CN¥25m over the trailing twelve months. So it had a cash runway of approximately 10 months from December 2019. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. You can see how its cash balance has changed over time in the image below.
How Well Is China 33 Media Group Growing?
It was quite stunning to see that China 33 Media Group increased its cash burn by 620% over the last year. On the bright side, at least operating revenue was up 41% over the same period, giving some cause for hope. 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 China 33 Media Group is growing revenue over time by checking this visualization of past revenue growth.
Can China 33 Media Group Raise More Cash Easily?
Given the trajectory of China 33 Media Group’s cash burn, many investors will already be thinking about how it might raise more cash in the future. 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.
China 33 Media Group has a market capitalisation of CN¥69m and burnt through CN¥25m last year, which is 36% of the company’s market value. That’s not insignificant, and if the company had to sell enough shares to fund another year’s growth at the current share price, you’d likely witness fairly costly dilution.
How Risky Is China 33 Media Group’s Cash Burn Situation?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought China 33 Media Group’s revenue growth was relatively promising. Summing up, we think the China 33 Media Group’s cash burn is a risk, based on the factors we mentioned in this article. Separately, we looked at different risks affecting the company and spotted 3 warning signs for China 33 Media Group (of which 2 are a bit concerning!) you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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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. 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. Thank you for reading.