Here's Why We're Not Too Worried About Huayi Tencent Entertainment's (HKG:419) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. By way of example, Huayi Tencent Entertainment (HKG:419) has seen its share price rise 562% over the last year, delighting many shareholders. 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 its strong share price performance, we think it's worthwhile for Huayi Tencent Entertainment shareholders to consider whether its cash burn is concerning. 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. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Huayi Tencent Entertainment

How Long Is Huayi Tencent Entertainment's Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In December 2020, Huayi Tencent Entertainment had HK$114m in cash, and was debt-free. Looking at the last year, the company burnt through HK$72m. That means it had a cash runway of around 19 months as of December 2020. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.

How Well Is Huayi Tencent Entertainment Growing?

Happily, Huayi Tencent Entertainment is travelling in the right direction when it comes to its cash burn, which is down 66% over the last year. And it could also show revenue growth of 9.4% in the same period. It seems to be growing nicely. In reality, this article only makes a short study of the company's growth data. You can take a look at how Huayi Tencent Entertainment has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Huayi Tencent Entertainment Raise Cash?

While Huayi Tencent Entertainment 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Huayi Tencent Entertainment has a market capitalisation of HK$6.5b and burnt through HK$72m last year, which is 1.1% of the company's market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

So, Should We Worry About Huayi Tencent Entertainment's Cash Burn?

As you can probably tell by now, we're not too worried about Huayi Tencent Entertainment's cash burn. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. On this analysis its revenue growth was its weakest feature, but we are not concerned about it. 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. An in-depth examination of risks revealed 1 warning sign for Huayi Tencent Entertainment that readers should think about before committing capital to this stock.

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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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