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, 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 PacRay International Holdings (HKG:1010) shareholders be worried about its cash burn? For the purpose of this article, we’ll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Check out our latest analysis for PacRay International Holdings
How Long Is PacRay International Holdings’s Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. When PacRay International Holdings last reported its balance sheet in June 2019, it had zero debt and cash worth HK$24m. Looking at the last year, the company burnt through HK$31m. So it had a cash runway of approximately 9 months from June 2019. That’s quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. You can see how its cash balance has changed over time in the image below.
How Well Is PacRay International Holdings Growing?
We reckon the fact that PacRay International Holdings managed to shrink its cash burn by 36% over the last year is rather encouraging. Unfortunately, however, operating revenue declined by 26% during the period. In light of the data above, we’re fairly sanguine about the business growth trajectory. Of course, we’ve only taken a quick look at the stock’s growth metrics, here. This graph of historic earnings and revenue shows how PacRay International Holdings is building its business over time.
How Hard Would It Be For PacRay International Holdings To Raise More Cash For Growth?
Since PacRay International Holdings revenue has been falling, the market will likely be considering how it can raise more cash if need be. 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.
PacRay International Holdings has a market capitalisation of HK$229m and burnt through HK$31m last year, which is 14% of the company’s market value. Given that situation, it’s fair to say the company wouldn’t have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
So, Should We Worry About PacRay International Holdings’s Cash Burn?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought PacRay International Holdings’s cash burn reduction was relatively promising. We don’t think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. 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 PacRay International Holdings CEO is paid..
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)
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.
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.