Stock Analysis

We Think Fujikon Industrial Holdings (HKG:927) Can Afford To Drive Business Growth

SEHK:927
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There's no doubt that money can be made by owning shares of unprofitable businesses. 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. 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.

Given this risk, we thought we'd take a look at whether Fujikon Industrial Holdings (HKG:927) 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. Let's start with an examination of the business' cash, relative to its cash burn.

Our analysis indicates that 927 is potentially overvalued!

When Might Fujikon Industrial 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. As at March 2022, Fujikon Industrial Holdings had cash of HK$371m and no debt. In the last year, its cash burn was HK$101m. That means it had a cash runway of about 3.7 years as of March 2022. A runway of this length affords the company the time and space it needs to develop the business. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
SEHK:927 Debt to Equity History November 18th 2022

Is Fujikon Industrial Holdings' Revenue Growing?

Given that Fujikon Industrial 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. In fact, operating revenue has stayed pretty steady over the last twelve months. In reality, this article only makes a short study of the company's growth data. You can take a look at how Fujikon Industrial Holdings has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Fujikon Industrial Holdings Raise Cash?

Since its revenue growth is moving in the wrong direction, Fujikon Industrial Holdings shareholders may wish to think ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Fujikon Industrial Holdings' cash burn of HK$101m is about 32% of its HK$319m market capitalisation. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

Is Fujikon Industrial Holdings' Cash Burn A Worry?

On this analysis of Fujikon Industrial Holdings' cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Fujikon Industrial Holdings (2 are a bit concerning!) that you should be aware of before investing here.

Of course Fujikon Industrial 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.

Valuation is complex, but we're helping make it simple.

Find out whether Fujikon Industrial Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.