We Think HKE Holdings (HKG:1726) Needs To Drive Business Growth Carefully

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 should HKE Holdings (HKG:1726) shareholders be worried about its cash burn? In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for HKE Holdings

How Long Is HKE Holdings' 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. When HKE Holdings last reported its balance sheet in June 2022, it had zero debt and cash worth S$19m. Looking at the last year, the company burnt through S$11m. Therefore, from June 2022 it had roughly 22 months of cash runway. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.

How Well Is HKE Holdings Growing?

It was quite stunning to see that HKE Holdings increased its cash burn by 1,372% over the last year. As if that's not bad enough, the operating revenue also dropped by 2.3%, making us very wary indeed. Considering these two factors together makes us nervous about the direction the company seems to be heading. 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 HKE Holdings is building its business over time.

How Easily Can HKE Holdings Raise Cash?

Since HKE Holdings can't yet boast improving growth metrics, 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 and drive growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

HKE Holdings has a market capitalisation of S$234m and burnt through S$11m last year, which is 4.5% of the company's market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

How Risky Is HKE Holdings' Cash Burn Situation?

On this analysis of HKE Holdings' cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. 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, HKE Holdings has 2 warning signs (and 1 which is potentially serious) 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.