We're Not Very Worried About Major Holdings' (HKG:1389) Cash Burn Rate

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, Major Holdings (HKG:1389) shareholders have done very well over the last year, with the share price soaring by 159%. 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 notwithstanding the buoyant share price, we think it's well worth asking whether Major Holdings' cash burn is too risky. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.

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When Might Major Holdings Run Out Of Money?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. In September 2024, Major Holdings had HK$18m in cash, and was debt-free. Importantly, its cash burn was HK$12m over the trailing twelve months. That means it had a cash runway of around 18 months as of September 2024. 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. Depicted below, you can see how its cash holdings have changed over time.

Check out our latest analysis for Major Holdings

Is Major Holdings' Revenue Growing?

Given that Major 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. Although it's hardly brilliant growth, it's good to see the company grew revenue by 11% in the last year. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Major Holdings has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Major Holdings Raise Cash?

While Major Holdings is showing solid revenue growth, it's still worth considering how easily it could raise more cash, even just to fuel faster 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.

Major Holdings' cash burn of HK$12m is about 6.0% of its HK$194m 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 Major Holdings' Cash Burn?

Major Holdings appears to be in pretty good health when it comes to its cash burn situation. Not only was its cash runway quite good, but its cash burn relative to its market cap was a real positive. 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 Major Holdings' situation. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 1 warning sign for Major Holdings that investors should know when investing in the stock.

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. 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.