When Will The 13 Holdings Limited (HKG:577) Run Out Of Money?

As the HK$577.38M market cap The 13 Holdings Limited (SEHK:577) released another year of negative earnings, investors may be on edge waiting for breakeven. The single most important question to ask when you’re investing in a loss-making company is – will they need to raise cash again, and if so, when? Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to come back to market for additional capital raising. This may not always be on their own terms, which could hurt current shareholders if the new deal lowers the value of their shares. Looking at 13 Holdings’s latest financial data, I will gauge when the company may run out of cash and need to raise more money. View our latest analysis for 13 Holdings

What is cash burn?

Cash burn is when a loss-making company spends its equity to fund its expenses before making money from its day-to-day business. Currently, 13 Holdings has HK$363.55M in cash holdings and producing negative cash flows from its day-to-day activities of -HK$197.60M. How fast 13 Holdings runs down its cash supply over time is known as the cash burn rate. The most significant threat facing investor is the company going out of business when it runs out of money and cannot raise any more capital. 13 Holdings operates in the construction and engineering industry, which delivered positive earnings in the past year. This means, on average, its industry peers operating are profitable. 13 Holdings runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.

SEHK:577 Income Statement Apr 26th 18
SEHK:577 Income Statement Apr 26th 18

When will 13 Holdings need to raise more cash?

13 Holdings has to pay its employees and other necessities such as rent and admin costs in order to keep its business running. These costs are called operational expenses, which is sometimes shortened to opex. In this calculation I’ve only included recurring sales, general and admin (SG&A) expenses, and R&D expenses occured within they year. Over the last twelve months, opex (excluding one-offs) increased by 10.19%, which is relatively reasonable for a small-cap company. This means that, if 13 Holdings continues to grow its opex at this rate, given how much money it currently has in the bank, it will need to raise capital again in 1.2 years. Furthermore, even if 13 Holdings kept its opex level at the current HK$302.20M, it will still be coming to market in about 1.2 years. Although this is a relatively simplistic calculation, and 13 Holdings may reduce its costs or open a new line of credit instead of issuing new equity shares, the analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.

Next Steps:

Loss-making companies are a risky play, especially those that are still growing its opex at a high rate. Though, this shouldn’t discourage you from considering entering the stock in the future. The cash burn analysis result indicates a cash constraint for the company, due to its high opex growth and its level of cash reserves. This suggests an opportunity to enter into the stock, potentially at an attractive price, should 13 Holdings come to market to fund its growth. This is only a rough assessment of financial health, and I’m sure 577 has company-specific issues impacting its cash management decisions. You should continue to research 13 Holdings to get a more holistic view of the company by looking at:
  1. Historical Performance: What has 577’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on 13 Holdings’s board and the CEO’s back ground.
  3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 30 September 2017. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.