We Think Perfectech International Holdings (HKG:765) Can Afford To Drive Business Growth

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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for Perfectech International Holdings (HKG:765) shareholders is whether they should be concerned by its rate of 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Perfectech International Holdings

When Might Perfectech International Holdings Run Out Of Money?

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. When Perfectech International Holdings last reported its June 2023 balance sheet in September 2023, it had zero debt and cash worth HK$51m. Looking at the last year, the company burnt through HK$27m. So it had a cash runway of approximately 22 months from June 2023. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.

Is Perfectech International Holdings' Revenue Growing?

Given that Perfectech International Holdings 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. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 4.3%. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Perfectech International Holdings has developed its business over time by checking this visualization of its revenue and earnings history.

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

Given its problematic fall in revenue, Perfectech International Holdings shareholders should consider how the company could fund its growth, if it turns out it needs more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Perfectech International Holdings has a market capitalisation of HK$284m and burnt through HK$27m last year, which is 9.6% of the company's market value. 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.

Is Perfectech International Holdings' Cash Burn A Worry?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Perfectech International Holdings' cash burn relative to its market cap was relatively promising. 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 Perfectech International Holdings' situation. Taking an in-depth view of risks, we've identified 2 warning signs for Perfectech International Holdings that you should be aware of before investing.

Of course Perfectech International Holdings may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.