Here's Why We're Not Too Worried About CEFC Hong Kong Financial Investment's (HKG:1520) Cash Burn Situation

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. By way of example, CEFC Hong Kong Financial Investment (HKG:1520) has seen its share price rise 177% over the last year, delighting many shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

In light of its strong share price run, we think now is a good time to investigate how risky CEFC Hong Kong Financial Investment's cash burn is. 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'.

Check out our latest analysis for CEFC Hong Kong Financial Investment

When Might CEFC Hong Kong Financial Investment Run Out Of Money?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When CEFC Hong Kong Financial Investment last reported its balance sheet in December 2020, it had zero debt and cash worth HK$79m. In the last year, its cash burn was HK$21m. Therefore, from December 2020 it had 3.8 years of cash runway. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.

How Well Is CEFC Hong Kong Financial Investment Growing?

We reckon the fact that CEFC Hong Kong Financial Investment managed to shrink its cash burn by 50% over the last year is rather encouraging. But the revenue dip of 28% in the same period was a bit concerning. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. 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 CEFC Hong Kong Financial Investment is building its business over time.

Can CEFC Hong Kong Financial Investment Raise More Cash Easily?

There's no doubt CEFC Hong Kong Financial Investment seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. 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 comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

CEFC Hong Kong Financial Investment's cash burn of HK$21m is about 6.2% of its HK$333m market capitalisation. 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.

Is CEFC Hong Kong Financial Investment's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way CEFC Hong Kong Financial Investment is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. While its falling revenue wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. On another note, CEFC Hong Kong Financial Investment has 4 warning signs (and 1 which shouldn't be ignored) we think 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. 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.
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