Here's Why We're Not Too Worried About Koolearn Technology Holding's (HKG:1797) Cash Burn Situation

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 Koolearn Technology Holding (HKG:1797) 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for Koolearn Technology Holding

When Might Koolearn Technology Holding Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at November 2020, Koolearn Technology Holding had cash of CN¥2.9b and no debt. In the last year, its cash burn was CN¥978m. That means it had a cash runway of about 3.0 years as of November 2020. A runway of this length affords the company the time and space it needs to develop the business. We should note, however, that if we extrapolate recent trends in its cash burn, then its cash runway would get a lot longer. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Koolearn Technology Holding Growing?

It was quite stunning to see that Koolearn Technology Holding increased its cash burn by 511% over the last year. While operating revenue was up over the same period, the 18% gain gives us scant comfort. Taken together, we think these growth metrics are a little worrying. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Hard Would It Be For Koolearn Technology Holding To Raise More Cash For Growth?

Even though it seems like Koolearn Technology Holding is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. 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).

Koolearn Technology Holding's cash burn of CN¥978m is about 13% of its CN¥7.7b market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

So, Should We Worry About Koolearn Technology Holding's Cash Burn?

On this analysis of Koolearn Technology Holding's cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 4 warning signs for Koolearn Technology Holding that investors should know when investing in the stock.

Of course Koolearn Technology Holding 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.

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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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