We Think World Houseware (Holdings) (HKG:713) Can Afford To Drive Business Growth

Just because a business does not make any money, does not mean that the stock will go down. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given this risk, we thought we'd take a look at whether World Houseware (Holdings) (HKG:713) shareholders should be worried about its cash burn. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for World Houseware (Holdings)

When Might World Houseware (Holdings) Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2024, World Houseware (Holdings) had HK$643m in cash, and was debt-free. Looking at the last year, the company burnt through HK$96m. That means it had a cash runway of about 6.7 years as of June 2024. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.

How Well Is World Houseware (Holdings) Growing?

At first glance it's a bit worrying to see that World Houseware (Holdings) actually boosted its cash burn by 12%, year on year. And we must say we find it concerning that operating revenue dropped 26% over the same period. Considering both these metrics, we're a little concerned about how the company is developing. In reality, this article only makes a short study of the company's growth data. You can take a look at how World Houseware (Holdings) has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can World Houseware (Holdings) Raise Cash?

Even though it seems like World Houseware (Holdings) is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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).

Since it has a market capitalisation of HK$412m, World Houseware (Holdings)'s HK$96m in cash burn equates to about 23% 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.

How Risky Is World Houseware (Holdings)'s Cash Burn Situation?

On this analysis of World Houseware (Holdings)'s cash burn, we think its cash runway was reassuring, while its falling revenue has us a bit worried. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Taking a deeper dive, we've spotted 3 warning signs for World Houseware (Holdings) you should be aware of, and 1 of them is significant.

Of course World Houseware (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.