Will Golden Faith Group Holdings (HKG:2863) Spend Its Cash Wisely?

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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should Golden Faith Group Holdings (HKG:2863) shareholders be worried about its cash burn? 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.

See our latest analysis for Golden Faith Group Holdings

When Might Golden Faith Group Holdings Run Out Of Money?

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 Golden Faith Group Holdings last reported its September 2024 balance sheet in December 2024, it had zero debt and cash worth HK$146m. Looking at the last year, the company burnt through HK$61m. So it had a cash runway of about 2.4 years from September 2024. Arguably, that's a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.

How Well Is Golden Faith Group Holdings Growing?

One thing for shareholders to keep front in mind is that Golden Faith Group Holdings increased its cash burn by 7,831% in the last twelve months. That does give us pause, and we can't take much solace in the operating revenue growth of 9.7% in the same time frame. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. In reality, this article only makes a short study of the company's growth data. You can take a look at how Golden Faith Group Holdings has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Golden Faith Group Holdings Raise Cash?

While Golden Faith Group Holdings seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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 HK$163m, Golden Faith Group Holdings' HK$61m in cash burn equates to about 38% of its market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

So, Should We Worry About Golden Faith Group Holdings' Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Golden Faith Group Holdings' cash runway was relatively promising. Summing up, we think the Golden Faith Group Holdings' cash burn is a risk, based on the factors we mentioned in this article. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Golden Faith Group Holdings (of which 1 is a bit concerning!) you should know about.

Of course Golden Faith Group Holdings may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.