We Think Emperor Entertainment Hotel (HKG:296) Needs To Drive Business Growth Carefully

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, 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.

So, the natural question for Emperor Entertainment Hotel (HKG:296) 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'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Our analysis indicates that 296 is potentially overvalued!

How Long Is Emperor Entertainment Hotel's Cash Runway?

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. When Emperor Entertainment Hotel last reported its balance sheet in September 2022, it had zero debt and cash worth HK$437m. Importantly, its cash burn was HK$173m over the trailing twelve months. That means it had a cash runway of about 2.5 years as of September 2022. Arguably, that's a prudent and sensible length of runway to have. The image below shows how its cash balance has been changing over the last few years.

How Well Is Emperor Entertainment Hotel Growing?

Emperor Entertainment Hotel reduced its cash burn by 2.4% during the last year, which points to some degree of discipline. Having said that, the flat operating revenue was a bit mundane. In light of the data above, we're fairly sanguine about the business growth trajectory. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Emperor Entertainment Hotel has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Emperor Entertainment Hotel Raise Cash?

While Emperor Entertainment Hotel seems to be in a fairly good position, 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. Commonly, a business will sell new shares in itself to raise cash and drive growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Emperor Entertainment Hotel has a market capitalisation of HK$582m and burnt through HK$173m last year, which is 30% of the company's market value. 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 Emperor Entertainment Hotel's Cash Burn A Worry?

On this analysis of Emperor Entertainment Hotel's cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap 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. Taking a deeper dive, we've spotted 2 warning signs for Emperor Entertainment Hotel you should be aware of, and 1 of them is potentially serious.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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.