Here's Why We're Not Too Worried About China Tontine Wines Group's (HKG:389) Cash Burn Situation

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 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 China Tontine Wines Group (HKG:389) shareholders should be worried about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for China Tontine Wines Group

When Might China Tontine Wines Group Run Out Of Money?

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. As at June 2023, China Tontine Wines Group had cash of CN¥108m and no debt. Importantly, its cash burn was CN¥30m over the trailing twelve months. That means it had a cash runway of about 3.5 years as of June 2023. There's no doubt that this is a reassuringly long runway. Depicted below, you can see how its cash holdings have changed over time.

Is China Tontine Wines Group's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because China Tontine Wines Group actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Unfortunately, the last year has been a disappointment, with operating revenue dropping 27% during the period. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how China Tontine Wines Group is building its business over time.

Can China Tontine Wines Group Raise More Cash Easily?

Given its problematic fall in revenue, China Tontine Wines Group shareholders should consider how the company could fund its growth, if it turns out it needs more cash. 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 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).

China Tontine Wines Group's cash burn of CN¥30m is about 11% of its CN¥266m 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.

How Risky Is China Tontine Wines Group's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way China Tontine Wines Group is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. 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. Taking a deeper dive, we've spotted 5 warning signs for China Tontine Wines Group you should be aware of, and 1 of them doesn't sit too well with us.

Of course China Tontine Wines 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.