Kingbo Strike (HKG:1421) Is In A Good Position To Deliver On Growth Plans

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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether Kingbo Strike (HKG:1421) shareholders should be worried about its 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. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Kingbo Strike

When Might Kingbo Strike Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Kingbo Strike last reported its balance sheet in December 2020, it had zero debt and cash worth HK$80m. Importantly, its cash burn was HK$25m over the trailing twelve months. Therefore, from December 2020 it had 3.2 years of cash runway. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.

How Well Is Kingbo Strike Growing?

We reckon the fact that Kingbo Strike managed to shrink its cash burn by 41% over the last year is rather encouraging. Having said that, the revenue growth of 54% was considerably more inspiring. 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 Kingbo Strike is growing revenue over time by checking this visualization of past revenue growth.

How Hard Would It Be For Kingbo Strike To Raise More Cash For Growth?

While Kingbo Strike 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. 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).

Kingbo Strike's cash burn of HK$25m is about 16% of its HK$156m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

Is Kingbo Strike's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Kingbo Strike is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. On this analysis its cash burn relative to its market cap was its weakest feature, but we are not concerned about it. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Kingbo Strike (1 shouldn't be ignored!) 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 companies insiders are buying, 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. 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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