Is Hong Kong ChaoShang Group (HKG:2322) In A Good Position To Deliver On Growth Plans?

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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, the natural question for Hong Kong ChaoShang Group (HKG:2322) shareholders is whether they should be concerned by its rate of 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Hong Kong ChaoShang Group

Does Hong Kong ChaoShang Group Have A Long 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. Hong Kong ChaoShang Group has such a small amount of debt that we'll set it aside, and focus on the HK$156m in cash it held at September 2022. In the last year, its cash burn was HK$85m. So it had a cash runway of approximately 22 months from September 2022. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. The image below shows how its cash balance has been changing over the last few years.

How Well Is Hong Kong ChaoShang Group Growing?

It was quite stunning to see that Hong Kong ChaoShang Group increased its cash burn by 568% over the last year. While that's concerning on it's own, the fact that operating revenue was actually down 10% over the same period makes us positively tremulous. 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 Hong Kong ChaoShang Group is building its business over time.

Can Hong Kong ChaoShang Group Raise More Cash Easily?

Since Hong Kong ChaoShang Group can't yet boast improving growth metrics, the market will likely be considering how it can raise more cash if need be. 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. 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).

Hong Kong ChaoShang Group has a market capitalisation of HK$3.3b and burnt through HK$85m last year, which is 2.6% of the company's market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

Is Hong Kong ChaoShang Group's Cash Burn A Worry?

On this analysis of Hong Kong ChaoShang Group's cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Hong Kong ChaoShang Group's situation. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 1 warning sign for Hong Kong ChaoShang Group that investors should know when investing in the stock.

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.