We're Not Worried About Fujian Holdings' (HKG:181) Cash Burn

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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Fujian Holdings (HKG:181) shareholders is whether they should be concerned by its rate of cash burn. 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.

Check out our latest analysis for Fujian Holdings

How Long Is Fujian Holdings' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2023, Fujian Holdings had HK$38m in cash, and was debt-free. Importantly, its cash burn was HK$1.7m over the trailing twelve months. So it had a very long cash runway of many years from June 2023. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Fujian Holdings Growing?

Happily, Fujian Holdings is travelling in the right direction when it comes to its cash burn, which is down 74% over the last year. And there's no doubt that the inspiriting revenue growth of 60% assisted in that improvement. Considering these factors, we're fairly impressed by its growth trajectory. In reality, this article only makes a short study of the company's growth data. You can take a look at how Fujian Holdings is growing revenue over time by checking this visualization of past revenue growth.

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

We are certainly impressed with the progress Fujian Holdings has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. 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.

Since it has a market capitalisation of HK$178m, Fujian Holdings' HK$1.7m in cash burn equates to about 0.9% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

Is Fujian Holdings' Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Fujian Holdings is burning through its cash. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. And even its cash burn reduction was very encouraging. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. On another note, Fujian Holdings has 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.

Of course Fujian 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.

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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.