Companies Like Golden Ponder Holdings (HKG:1783) Are In A Position To Invest In Growth

Just because a business does not make any money, does not mean that the stock will go down. For example, Golden Ponder Holdings (HKG:1783) shareholders have done very well over the last year, with the share price soaring by 167%. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So notwithstanding the buoyant share price, we think it's well worth asking whether Golden Ponder Holdings' cash burn is too risky. 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Golden Ponder Holdings

Does Golden Ponder Holdings Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. Golden Ponder Holdings has such a small amount of debt that we'll set it aside, and focus on the HK$99m in cash it held at March 2021. Looking at the last year, the company burnt through HK$12m. That means it had a cash runway of about 8.6 years as of March 2021. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. Depicted below, you can see how its cash holdings have changed over time.

Is Golden Ponder Holdings' Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Golden Ponder Holdings actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Unfortunately, the last year has been a disappointment, with operating revenue dropping 26% during the period. In reality, this article only makes a short study of the company's growth data. You can take a look at how Golden Ponder Holdings has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For Golden Ponder Holdings To Raise More Cash For Growth?

Since its revenue growth is moving in the wrong direction, Golden Ponder Holdings shareholders may wish to think ahead to when the company may need to raise more cash. 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. 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.

Since it has a market capitalisation of HK$288m, Golden Ponder Holdings' HK$12m in cash burn equates to about 4.0% of its market value. 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 Golden Ponder Holdings' Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Golden Ponder Holdings is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While its falling revenue wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. 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, Golden Ponder Holdings has 3 warning signs (and 1 which makes us a bit uncomfortable) 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)

If you’re looking to trade a wide range of investments, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.