We can readily understand why investors are attracted to unprofitable companies. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
Given this risk, we thought we’d take a look at whether PacRay International Holdings (HKG:1010) shareholders should be worried about its cash burn. In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
When Might PacRay International Holdings Run Out Of Money?
You can calculate a company’s cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at December 2019, PacRay International Holdings had cash of HK$14m and no debt. Importantly, its cash burn was HK$8.9m over the trailing twelve months. That means it had a cash runway of around 19 months as of December 2019. While that cash runway isn’t too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.
How Well Is PacRay International Holdings Growing?
PacRay International Holdings managed to reduce its cash burn by 75% over the last twelve months, which suggests it’s on the right flight path. Pleasingly, this was achieved with the help of a 22% boost to revenue. It seems to be growing nicely. In reality, this article only makes a short study of the company’s growth data. You can take a look at how PacRay International Holdings has developed its business over time by checking this visualization of its revenue and earnings history.
How Easily Can PacRay International Holdings Raise Cash?
Even though it seems like PacRay International Holdings is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. We can compare a company’s cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year’s operations.
Since it has a market capitalisation of HK$559m, PacRay International Holdings’ HK$8.9m in cash burn equates to about 1.6% of its market value. 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 PacRay International Holdings’ Cash Burn A Worry?
As you can probably tell by now, we’re not too worried about PacRay International Holdings’ cash burn. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. And even though its cash runway wasn’t quite as impressive, it was still a positive. After taking into account the various metrics mentioned in this report, we’re pretty comfortable with how the company is spending its cash. On another note, PacRay International Holdings has 3 warning signs (and 1 which is potentially serious) we think you should know about.
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.
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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.
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