China Outfitters Holdings (HKG:1146) Is In A Good Position To Deliver On Growth Plans

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for China Outfitters Holdings (HKG:1146) shareholders is whether they should be concerned by its rate of 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for China Outfitters Holdings

When Might China Outfitters Holdings Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2021, China Outfitters Holdings had CN¥557m in cash, and was debt-free. Looking at the last year, the company burnt through CN¥104m. That means it had a cash runway of about 5.3 years as of December 2021. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. The image below shows how its cash balance has been changing over the last few years.

Is China Outfitters Holdings' Revenue Growing?

Given that China Outfitters Holdings actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. The grim reality for shareholders is that operating revenue fell by 56% over the last twelve months, which is not what we want to see in a cash burning company. In reality, this article only makes a short study of the company's growth data. You can take a look at how China Outfitters Holdings has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can China Outfitters Holdings Raise Cash?

Since its revenue growth is moving in the wrong direction, China Outfitters Holdings shareholders may wish to think ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.

China Outfitters Holdings' cash burn of CN¥104m is about 26% of its CN¥397m market capitalisation. 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 China Outfitters Holdings' Cash Burn?

On this analysis of China Outfitters Holdings' cash burn, we think its cash runway was reassuring, while its falling revenue has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about China Outfitters Holdings' situation. Separately, we looked at different risks affecting the company and spotted 3 warning signs for China Outfitters Holdings (of which 1 makes us a bit uncomfortable!) you should know about.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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.