Will Wealth Glory Holdings (HKG:8269) Spend Its Cash Wisely?

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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether Wealth Glory Holdings (HKG:8269) 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for Wealth Glory Holdings

When Might Wealth Glory Holdings Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Wealth Glory Holdings last reported its balance sheet in March 2022, it had zero debt and cash worth HK$9.2m. In the last year, its cash burn was HK$18m. So it had a cash runway of approximately 6 months from March 2022. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. You can see how its cash balance has changed over time in the image below.

How Well Is Wealth Glory Holdings Growing?

Some investors might find it troubling that Wealth Glory Holdings is actually increasing its cash burn, which is up 35% in the last year. In light of that, the flat year on year operating leverage is a bit off-putting. In light of the data above, we're fairly sanguine about the business growth trajectory. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Wealth Glory Holdings has developed its business over time by checking this visualization of its revenue and earnings history.

Can Wealth Glory Holdings Raise More Cash Easily?

Given the trajectory of Wealth Glory Holdings' cash burn, many investors will already be thinking about how it might raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Wealth Glory Holdings has a market capitalisation of HK$181m and burnt through HK$18m last year, which is 9.9% of the company's market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

So, Should We Worry About Wealth Glory Holdings' Cash Burn?

On this analysis of Wealth Glory Holdings' cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway has us a bit worried. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. Taking a deeper dive, we've spotted 4 warning signs for Wealth Glory Holdings you should be aware of, and 2 of them are a bit unpleasant.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.