Here's Why We're Not At All Concerned With Yangtzekiang Garment's (HKG:294) Cash Burn Situation

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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given this risk, we thought we'd take a look at whether Yangtzekiang Garment (HKG:294) shareholders should be worried about its cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

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How Long Is Yangtzekiang Garment's Cash Runway?

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. When Yangtzekiang Garment last reported its September 2024 balance sheet in December 2024, it had zero debt and cash worth HK$313m. Looking at the last year, the company burnt through HK$2.3m. That means it had a cash runway of very many years as of September 2024. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.

See our latest analysis for Yangtzekiang Garment

Is Yangtzekiang Garment's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Yangtzekiang Garment actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Unfortunately, the last year has been a disappointment, with operating revenue dropping 20% during the period. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Yangtzekiang Garment has developed its business over time by checking this visualization of its revenue and earnings history .

How Hard Would It Be For Yangtzekiang Garment To Raise More Cash For Growth?

Since its revenue growth is moving in the wrong direction, Yangtzekiang Garment 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. Many companies end up issuing new shares to fund future growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Since it has a market capitalisation of HK$192m, Yangtzekiang Garment's HK$2.3m in cash burn equates to about 1.2% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

So, Should We Worry About Yangtzekiang Garment's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Yangtzekiang Garment 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. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. 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. Separately, we looked at different risks affecting the company and spotted 2 warning signs for Yangtzekiang Garment (of which 1 is significant!) 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.