We're Hopeful That CEFC Hong Kong Financial Investment (HKG:1520) Will Use Its Cash Wisely

Just because a business does not make any money, does not mean that the stock will go down. By way of example, CEFC Hong Kong Financial Investment (HKG:1520) has seen its share price rise 130% over the last year, delighting many shareholders. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So notwithstanding the buoyant share price, we think it's well worth asking whether CEFC Hong Kong Financial Investment'scash burn is too risky In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for CEFC Hong Kong Financial Investment

When Might CEFC Hong Kong Financial Investment 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. As at June 2020, CEFC Hong Kong Financial Investment had cash of HK$86m and no debt. Looking at the last year, the company burnt through HK$27m. So it had a cash runway of about 3.2 years from June 2020. There's no doubt that this is a reassuringly long runway. Depicted below, you can see how its cash holdings have changed over time.

How Well Is CEFC Hong Kong Financial Investment Growing?

Some investors might find it troubling that CEFC Hong Kong Financial Investment is actually increasing its cash burn, which is up 46% in the last year. And we must say we find it concerning that operating revenue dropped 27% over the same period. Considering both these metrics, we're a little concerned about how the company is developing. 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.

How Hard Would It Be For CEFC Hong Kong Financial Investment To Raise More Cash For Growth?

Even though it seems like CEFC Hong Kong Financial Investment is developing its business nicely, we still like to consider how easily it could raise more money to accelerate 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 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.

CEFC Hong Kong Financial Investment's cash burn of HK$27m is about 16% of its HK$166m market capitalisation. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

So, Should We Worry About CEFC Hong Kong Financial Investment's Cash Burn?

On this analysis of CEFC Hong Kong Financial Investment's cash burn, we think its cash runway was reassuring, while its falling revenue has us a bit worried. 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 CEFC Hong Kong Financial Investment's situation. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for CEFC Hong Kong Financial Investment (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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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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