We're Hopeful That China Outfitters Holdings (HKG:1146) Will Use Its Cash Wisely

There's no doubt that money can be made by owning shares of unprofitable businesses. 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 China Outfitters Holdings (HKG:1146) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for China Outfitters Holdings

Does China Outfitters Holdings Have A Long Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In December 2022, China Outfitters Holdings had CN¥497m in cash, and was debt-free. Looking at the last year, the company burnt through CN¥32m. That means it had a cash runway of very many years as of December 2022. 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 China Outfitters Holdings Growing?

China Outfitters Holdings managed to reduce its cash burn by 70% over the last twelve months, which suggests it's on the right flight path. Unfortunately, however, operating revenue dropped 36% during the same time frame. On balance, we'd say the company is improving over time. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how China Outfitters Holdings is building its business over time.

Can China Outfitters Holdings Raise More Cash Easily?

While China Outfitters Holdings seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. 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.

Since it has a market capitalisation of CN¥439m, China Outfitters Holdings' CN¥32m in cash burn equates to about 7.2% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

How Risky Is China Outfitters Holdings' Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way China Outfitters Holdings is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While we must concede that its falling revenue is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. 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. Separately, we looked at different risks affecting the company and spotted 3 warning signs for China Outfitters Holdings (of which 2 are potentially serious!) you should know about.

Of course China Outfitters 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 that insiders are buying.

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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.