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

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for China Outfitters Holdings

When Might China Outfitters 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. When China Outfitters Holdings last reported its balance sheet in December 2021, it had zero debt and cash worth CN¥600m. Looking at the last year, the company burnt through CN¥105m. So it had a cash runway of about 5.7 years from December 2021. 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.

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 harsh truth is that operating revenue dropped 56% in the last year, which is quite problematic for a cash burning company. 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 China Outfitters Holdings is building its business over time.

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. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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¥105m is about 25% of its CN¥419m 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.

Is China Outfitters Holdings' Cash Burn A Worry?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought China Outfitters Holdings' cash runway was relatively promising. 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 China Outfitters Holdings you should be aware of, and 1 of them is a bit concerning.

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.