Here's Why We're Not Too Worried About Solis Holdings' (HKG:2227) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given this risk, we thought we'd take a look at whether Solis Holdings (HKG:2227) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Solis Holdings

How Long Is Solis Holdings' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2022, Solis Holdings had S$17m in cash, and was debt-free. In the last year, its cash burn was S$3.6m. So it had a cash runway of about 4.9 years from June 2022. A runway of this length affords the company the time and space it needs to develop the business. You can see how its cash balance has changed over time in the image below.

Is Solis Holdings' Revenue Growing?

Given that Solis Holdings actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. It's nice to see that operating revenue was up 33% in the last year. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Solis Holdings is growing revenue over time by checking this visualization of past revenue growth.

How Easily Can Solis Holdings Raise Cash?

Notwithstanding Solis Holdings' revenue growth, it is still important to consider how it could raise more money, if it needs to. Companies can raise capital through either debt or equity. 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 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.

Since it has a market capitalisation of S$30m, Solis Holdings' S$3.6m in cash burn equates to about 12% of its market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

So, Should We Worry About Solis Holdings' Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Solis Holdings is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Its cash burn relative to its market cap wasn't quite as good, but was still rather encouraging! After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash. Separately, we looked at different risks affecting the company and spotted 2 warning signs for Solis Holdings (of which 1 is significant!) you should know about.

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.

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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.