We're Not Worried About Perfectech International Holdings' (HKG:765) Cash Burn

Just because a business does not make any money, does not mean that the stock will go down. 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. 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 should Perfectech International Holdings (HKG:765) shareholders be worried about its cash burn? 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for Perfectech International Holdings

Does Perfectech International Holdings Have A Long 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. In December 2021, Perfectech International Holdings had HK$72m in cash, and was debt-free. Importantly, its cash burn was HK$7.2m over the trailing twelve months. That means it had a cash runway of about 10.0 years as of December 2021. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.

Is Perfectech International Holdings' Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Perfectech International Holdings actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Although it's hardly brilliant growth, it's good to see the company grew revenue by 15% in the last year. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Perfectech International Holdings is building its business over time.

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

Notwithstanding Perfectech International Holdings' revenue growth, it is still important to consider how it could raise more money, if it needs to. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Since it has a market capitalisation of HK$180m, Perfectech International Holdings' HK$7.2m in cash burn equates to about 4.0% of its 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.

How Risky Is Perfectech International Holdings' Cash Burn Situation?

As you can probably tell by now, we're not too worried about Perfectech International Holdings' cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Its revenue growth wasn't quite as good, but was still rather encouraging! After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. On another note, Perfectech International Holdings has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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. 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.