Here's Why We're Watching Artini Holdings' (HKG:789) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. Indeed, Artini Holdings (HKG:789) stock is up 101% in the last year, providing strong gains for shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So notwithstanding the buoyant share price, we think it's well worth asking whether Artini Holdings' cash burn is too risky. 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.

See our latest analysis for Artini Holdings

Does Artini Holdings Have A Long 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. As at September 2022, Artini Holdings had cash of HK$22m and no debt. In the last year, its cash burn was HK$16m. Therefore, from September 2022 it had roughly 16 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 Artini Holdings' Revenue Growing?

Given that Artini 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 29%. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Artini Holdings has developed its business over time by checking this visualization of its revenue and earnings history.

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

Given its problematic fall in revenue, Artini Holdings shareholders should consider how the company could fund its growth, if it turns out it needs more cash. Companies can raise capital through either debt or equity. 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.

Since it has a market capitalisation of HK$164m, Artini Holdings' HK$16m in cash burn equates to about 9.6% 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.

So, Should We Worry About Artini Holdings' Cash Burn?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Artini 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 Artini Holdings' situation. Taking a deeper dive, we've spotted 3 warning signs for Artini Holdings you should be aware of, and 2 of them are significant.

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.