Here's Why We're Not Too Worried About Pegasus International Holdings' (HKG:676) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether Pegasus International Holdings (HKG:676) shareholders should be worried about its cash burn. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Pegasus International Holdings

How Long Is Pegasus International Holdings' 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 Pegasus International Holdings last reported its balance sheet in June 2020, it had zero debt and cash worth US$11m. Looking at the last year, the company burnt through US$4.8m. That means it had a cash runway of about 2.3 years as of June 2020. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.

How Is Pegasus International Holdings' Cash Burn Changing Over Time?

Whilst it's great to see that Pegasus International Holdings has already begun generating revenue from operations, last year it only produced US$3.1m, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 54% over the last year suggests some degree of prudence. Admittedly, we're a bit cautious of Pegasus International Holdings due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Hard Would It Be For Pegasus International Holdings To Raise More Cash For Growth?

While we're comforted by the recent reduction evident from our analysis of Pegasus International Holdings' cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. 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. 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.

Pegasus International Holdings' cash burn of US$4.8m is about 6.7% of its US$71m 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.

So, Should We Worry About Pegasus International Holdings' Cash Burn?

As you can probably tell by now, we're not too worried about Pegasus International Holdings' cash burn. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. And even its cash burn reduction was very encouraging. Looking at all the measures in this article, together, we're not worried about its rate of cash burn, which seems to be under control. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Pegasus International Holdings (1 shouldn't be ignored!) 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 interesting companies, 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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