We're Not Very Worried About Golden Ponder Holdings' (HKG:1783) Cash Burn Rate

Just because a business does not make any money, does not mean that the stock will go down. By way of example, Golden Ponder Holdings (HKG:1783) has seen its share price rise 184% over the last year, delighting many shareholders. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given its strong share price performance, we think it's worthwhile for Golden Ponder Holdings shareholders to consider whether its cash burn is concerning. 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 Golden Ponder Holdings

When Might Golden Ponder Holdings 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 Golden Ponder Holdings last reported its balance sheet in March 2021, it had zero debt and cash worth HK$99m. 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. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. You can see how its cash balance has changed over time in the image below.

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. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 26%. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Golden Ponder Holdings is building its business over time.

How Easily Can Golden Ponder Holdings Raise Cash?

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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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).

Golden Ponder Holdings has a market capitalisation of HK$268m and burnt through HK$12m last year, which is 4.3% of the company's 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?

As you can probably tell by now, we're not too worried about Golden Ponder Holdings' cash burn. For example, we think its cash runway suggests that the company is on a good path. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. 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. Taking a deeper dive, we've spotted 2 warning signs for Golden Ponder Holdings you should be aware of, and 1 of them is significant.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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.

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