Companies Like Noble Engineering Group Holdings (HKG:8445) Are In A Position To Invest In Growth

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, Noble Engineering Group Holdings (HKG:8445) shareholders have done very well over the last year, with the share price soaring by 341%. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

In light of its strong share price run, we think now is a good time to investigate how risky Noble Engineering Group Holdings' cash burn is. 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.

View our latest analysis for Noble Engineering Group Holdings

SWOT Analysis for Noble Engineering Group Holdings

When Might Noble Engineering Group Holdings Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at September 2022, Noble Engineering Group Holdings had cash of HK$38m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was HK$12m. That means it had a cash runway of about 3.3 years as of September 2022. There's no doubt that this is a reassuringly long runway. Depicted below, you can see how its cash holdings have changed over time.

Is Noble Engineering Group Holdings' Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Noble Engineering Group Holdings actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Unfortunately, the last year has been a disappointment, with operating revenue dropping 35% during the period. 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 Noble Engineering Group Holdings is building its business over time.

How Hard Would It Be For Noble Engineering Group Holdings To Raise More Cash For Growth?

Since its revenue growth is moving in the wrong direction, Noble Engineering Group Holdings shareholders may wish to think ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. 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.

Noble Engineering Group Holdings has a market capitalisation of HK$244m and burnt through HK$12m last year, which is 4.7% 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.

Is Noble Engineering Group Holdings' Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Noble Engineering Group Holdings' cash burn. For example, we think its cash runway suggests that the company is on a good path. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Taking a deeper dive, we've spotted 3 warning signs for Noble Engineering Group Holdings you should be aware of, and 1 of them is 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)

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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.