We're Hopeful That Dark Horse Technology Group (SZSE:300688) Will Use Its Cash Wisely

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. 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.

So should Dark Horse Technology Group (SZSE:300688) shareholders be worried about its 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Dark Horse Technology Group

When Might Dark Horse Technology Group Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2023, Dark Horse Technology Group had CN¥389m in cash, and was debt-free. Importantly, its cash burn was CN¥46m over the trailing twelve months. That means it had a cash runway of about 8.5 years as of September 2023. 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. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Dark Horse Technology Group Growing?

It was quite stunning to see that Dark Horse Technology Group increased its cash burn by 341% over the last year. And that is all the more of a concern in light of the fact that operating revenue was actually down by 53% in the last year, as the company no doubt scrambles to change its fortunes. Considering these two factors together makes us nervous about the direction the company seems to be heading. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Dark Horse Technology Group is building its business over time.

Can Dark Horse Technology Group Raise More Cash Easily?

Even though it seems like Dark Horse Technology Group is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Dark Horse Technology Group has a market capitalisation of CN¥3.6b and burnt through CN¥46m last year, which is 1.3% of the company's 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.

So, Should We Worry About Dark Horse Technology Group's Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Dark Horse Technology Group's cash runway was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Dark Horse Technology Group's situation. On another note, we conducted an in-depth investigation of the company, and identified 2 warning signs for Dark Horse Technology Group (1 is concerning!) that you should be aware of before investing here.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.