CEFC Hong Kong Financial Investment Company Limited (SEHK:1520) continues its loss-making streak, announcing negative earnings for its latest financial year ending. The single most important question to ask when you’re investing in a loss-making company is – will they need to raise cash again, and if so, when? Additional cash raising may dilute the value of your shares, and since CEFC Hong Kong Financial Investment is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined CEFC Hong Kong Financial Investment’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital. See our latest analysis for CEFC Hong Kong Financial Investment
What is cash burn?
Cash burn is when a loss-making company spends its equity to fund its expenses before making money from its day-to-day business. Currently, CEFC Hong Kong Financial Investment has HK$242.18M in cash holdings and producing negative cash flows from its day-to-day activities of -HK$17.07M. The cash burn rate refers to the rate at which the company uses up its supply of cash over time. The most significant threat facing investor is the company going out of business when it runs out of money and cannot raise any more capital. CEFC Hong Kong Financial Investment operates in the apparel, accessories and luxury goods industry, which delivered positive earnings in the past year. This means, on average, its industry peers operating are profitable. CEFC Hong Kong Financial Investment runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.
When will CEFC Hong Kong Financial Investment need to raise more cash?
Opex, or operational expenses, are the necessary costs CEFC Hong Kong Financial Investment must pay to keep the business running every day. For the purpose of this calculation I’ve only accounted for sales, general and admin (SG&A) expenses, and R&D expenses incurred within this year. In the past year, opex (excluding one-offs) rose by 14.81%, which is fairly normal for a small-cap. According to my analysis, if CEFC Hong Kong Financial Investment continues to grow at this rate, it will burn through its cash reserves by the next 2.1 years, and may be coming to market again. Not the best news for shareholders. Though, if CEFC Hong Kong Financial Investment kept its opex level at HK$107.55M, it will still come to market within the next couple of years, but slightly later. Even though this is analysis is fairly basic, and CEFC Hong Kong Financial Investment still can cut its overhead in the near future, or open a new line of credit instead of issuing new equity shares, the outcome of this analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.
Next Steps:
Loss-making companies are a risky play, especially those that are still growing its opex at a high rate. Though, this shouldn’t discourage you from considering entering the stock in the future. The cash burn analysis result indicates a cash constraint for the company, due to its high opex growth and its level of cash reserves. An opportunity may exist for you to enter into the stock at an attractive price, should CEFC Hong Kong Financial Investment come to market to fund its operations. Keep in mind I haven’t considered other factors such as how 1520 is expected to perform in the future. You should continue to research CEFC Hong Kong Financial Investment to get a more holistic view of the company by looking at:- Historical Performance: What has 1520’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on CEFC Hong Kong Financial Investment’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.