We Think China Tian Yuan Healthcare Group (HKG:557) Can Afford To Drive Business Growth

Just because a business does not make any money, does not mean that the stock will go down. 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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given this risk, we thought we'd take a look at whether China Tian Yuan Healthcare Group (HKG:557) 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'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for China Tian Yuan Healthcare Group

Does China Tian Yuan Healthcare Group Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When China Tian Yuan Healthcare Group last reported its balance sheet in June 2022, it had zero debt and cash worth HK$60m. In the last year, its cash burn was HK$23m. That means it had a cash runway of about 2.7 years as of June 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.

Is China Tian Yuan Healthcare Group's Revenue Growing?

Given that China Tian Yuan Healthcare Group actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 18%. In reality, this article only makes a short study of the company's growth data. You can take a look at how China Tian Yuan Healthcare Group has developed its business over time by checking this visualization of its revenue and earnings history.

Can China Tian Yuan Healthcare Group Raise More Cash Easily?

Since its revenue growth is moving in the wrong direction, China Tian Yuan Healthcare Group shareholders may wish to think ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

China Tian Yuan Healthcare Group's cash burn of HK$23m is about 7.3% of its HK$311m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

So, Should We Worry About China Tian Yuan Healthcare Group's Cash Burn?

As you can probably tell by now, we're not too worried about China Tian Yuan Healthcare Group's cash burn. For example, we think its cash runway suggests that the company is on a good path. While its falling revenue wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, China Tian Yuan Healthcare Group has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

Of course China Tian Yuan Healthcare Group 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.