Here's Why We're Not Too Worried About TOMO Holdings' (HKG:6928) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. 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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for TOMO Holdings (HKG:6928) shareholders is whether they should be concerned by its rate of 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for TOMO Holdings

When Might TOMO Holdings Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2023, TOMO Holdings had S$11m in cash, and was debt-free. Importantly, its cash burn was S$3.0m over the trailing twelve months. That means it had a cash runway of about 3.5 years as of June 2023. There's no doubt that this is a reassuringly long runway. Depicted below, you can see how its cash holdings have changed over time.

How Well Is TOMO Holdings Growing?

One thing for shareholders to keep front in mind is that TOMO Holdings increased its cash burn by 365% in the last twelve months. While that certainly gives us pause for thought, we take a lot of comfort in the strong annual revenue growth of 99%. 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 revenue growth shows how TOMO Holdings is building its business over time.

How Easily Can TOMO Holdings Raise Cash?

While TOMO Holdings seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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.

TOMO Holdings' cash burn of S$3.0m is about 6.0% of its S$50m 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 TOMO Holdings' Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way TOMO Holdings is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Taking a deeper dive, we've spotted 3 warning signs for TOMO Holdings you should be aware of, and 2 of them are a bit unpleasant.

Of course TOMO Holdings may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.