We're Not Very Worried About China Outfitters Holdings' (HKG:1146) Cash Burn Rate

We can readily understand why investors are attracted to unprofitable companies. 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. 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 China Outfitters Holdings (HKG:1146) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for China Outfitters Holdings

Does China Outfitters Holdings Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2022, China Outfitters Holdings had CN¥585m in cash, and was debt-free. Importantly, its cash burn was CN¥133m over the trailing twelve months. Therefore, from June 2022 it had 4.4 years of cash runway. There's no doubt that this is a reassuringly long runway. 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 54% 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.

Can China Outfitters Holdings Raise More Cash Easily?

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¥133m is about 30% of its CN¥440m 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.

How Risky Is China Outfitters Holdings' Cash Burn Situation?

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. 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 is concerning!) you should know about.

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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.