Here's Why We're Not Too Worried About Greater Bay Area Dynamic Growth Holding's (HKG:1189) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether Greater Bay Area Dynamic Growth Holding (HKG:1189) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Greater Bay Area Dynamic Growth Holding

When Might Greater Bay Area Dynamic Growth Holding Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2020, Greater Bay Area Dynamic Growth Holding had HK$1.8b in cash, and was debt-free. Looking at the last year, the company burnt through HK$31m. That means it had a cash runway of very many years as of June 2020. 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 Greater Bay Area Dynamic Growth Holding's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Greater Bay Area Dynamic Growth Holding actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Unfortunately, the last year has been a disappointment, with operating revenue dropping 48% during the period. In reality, this article only makes a short study of the company's growth data. You can take a look at how Greater Bay Area Dynamic Growth Holding has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For Greater Bay Area Dynamic Growth Holding To Raise More Cash For Growth?

Since its revenue growth is moving in the wrong direction, Greater Bay Area Dynamic Growth Holding 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. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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).

Greater Bay Area Dynamic Growth Holding's cash burn of HK$31m is about 19% of its HK$162m market capitalisation. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

How Risky Is Greater Bay Area Dynamic Growth Holding's Cash Burn Situation?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Greater Bay Area Dynamic Growth Holding's cash runway was relatively promising. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Taking an in-depth view of risks, we've identified 1 warning sign for Greater Bay Area Dynamic Growth Holding that you should be aware of before investing.

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. 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.
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