We're Not Very Worried About Chaoda Modern Agriculture (Holdings)'s (HKG:682) Cash Burn Rate

August 02, 2022
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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 Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should Chaoda Modern Agriculture (Holdings) (HKG:682) shareholders 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'. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for Chaoda Modern Agriculture (Holdings)

When Might Chaoda Modern Agriculture (Holdings) Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Chaoda Modern Agriculture (Holdings) last reported its balance sheet in December 2021, it had zero debt and cash worth CN¥101m. Looking at the last year, the company burnt through CN¥12m. So it had a cash runway of about 8.5 years from December 2021. 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.

SEHK:682 Debt to Equity History August 2nd 2022

Is Chaoda Modern Agriculture (Holdings)'s Revenue Growing?

Given that Chaoda Modern Agriculture (Holdings) 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. Although it's hardly brilliant growth, it's good to see the company grew revenue by 15% in the last year. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Chaoda Modern Agriculture (Holdings) has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Chaoda Modern Agriculture (Holdings) Raise Cash?

While Chaoda Modern Agriculture (Holdings) is showing solid revenue growth, 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. 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).

Chaoda Modern Agriculture (Holdings) has a market capitalisation of CN¥136m and burnt through CN¥12m last year, which is 8.7% of the company's market value. 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.

Is Chaoda Modern Agriculture (Holdings)'s Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Chaoda Modern Agriculture (Holdings) 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. And even though its revenue growth wasn't quite as impressive, it was still a positive. 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. An in-depth examination of risks revealed 1 warning sign for Chaoda Modern Agriculture (Holdings) that readers should think about before committing capital to this stock.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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