We can readily understand why investors are attracted to unprofitable companies. By way of example, Ev Dynamics (Holdings) (HKG:476) has seen its share price rise 180% over the last year, delighting many shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
In light of its strong share price run, we think now is a good time to investigate how risky Ev Dynamics (Holdings)'s cash burn is. 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
How Long Is Ev Dynamics (Holdings)'s Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In March 2021, Ev Dynamics (Holdings) had HK$69m in cash, and was debt-free. Importantly, its cash burn was HK$56m over the trailing twelve months. So it had a cash runway of approximately 15 months from March 2021. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time.
How Is Ev Dynamics (Holdings)'s Cash Burn Changing Over Time?
In our view, Ev Dynamics (Holdings) doesn't yet produce significant amounts of operating revenue, since it reported just HK$24m in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. As it happens, the company's cash burn reduced by 6.7% over the last year, which suggests that management are maintaining a fairly steady rate of business development, albeit with a slight decrease in spending. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Ev Dynamics (Holdings) is growing revenue over time by checking this visualization of past revenue growth.
How Easily Can Ev Dynamics (Holdings) Raise Cash?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Ev Dynamics (Holdings) to raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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).
Ev Dynamics (Holdings)'s cash burn of HK$56m is about 5.6% of its HK$1.0b market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
So, Should We Worry About Ev Dynamics (Holdings)'s Cash Burn?
Ev Dynamics (Holdings) appears to be in pretty good health when it comes to its cash burn situation. One the one hand we have its solid cash runway, while on the other it can also boast very strong cash burn relative to its market cap. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. On another note, Ev Dynamics (Holdings) has 4 warning signs (and 1 which is a bit concerning) we think 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. 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.
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