We're Keeping An Eye On EPS Creative Health Technology Group's (HKG:3860) Cash Burn Rate

We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should EPS Creative Health Technology Group (HKG:3860) shareholders 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.

Check out our latest analysis for EPS Creative Health Technology Group

How Long Is EPS Creative Health Technology Group's Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at September 2022, EPS Creative Health Technology Group had cash of HK$172m and no debt. Importantly, its cash burn was HK$92m over the trailing twelve months. Therefore, from September 2022 it had roughly 23 months of cash runway. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. You can see how its cash balance has changed over time in the image below.

Is EPS Creative Health Technology Group's Revenue Growing?

Given that EPS Creative Health Technology Group 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. Unfortunately, the last year has been a disappointment, with operating revenue dropping 8.5% during the period. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how EPS Creative Health Technology Group is building its business over time.

How Hard Would It Be For EPS Creative Health Technology Group To Raise More Cash For Growth?

Given its problematic fall in revenue, EPS Creative Health Technology Group shareholders should consider how the company could fund its growth, if it turns out it needs 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. 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.

EPS Creative Health Technology Group has a market capitalisation of HK$485m and burnt through HK$92m last year, which is 19% of the company's market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

Is EPS Creative Health Technology Group's Cash Burn A Worry?

On this analysis of EPS Creative Health Technology Group'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 EPS Creative Health Technology Group's situation. Taking a deeper dive, we've spotted 3 warning signs for EPS Creative Health Technology Group you should be aware of, and 1 of them is concerning.

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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.