We Think Kelfred Holdings (HKG:1134) Can Afford To Drive Business Growth

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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given this risk, we thought we'd take a look at whether Kelfred Holdings (HKG:1134) 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'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Kelfred Holdings

When Might Kelfred Holdings Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2021, Kelfred Holdings had HK$37m in cash, and was debt-free. In the last year, its cash burn was HK$27m. So it had a cash runway of approximately 16 months from December 2021. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time.

Is Kelfred Holdings' Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Kelfred Holdings actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. It's nice to see that operating revenue was up 23% in the last year. In reality, this article only makes a short study of the company's growth data. You can take a look at how Kelfred Holdings has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Kelfred Holdings Raise Cash?

While Kelfred Holdings is showing solid revenue growth, 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. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

Since it has a market capitalisation of HK$275m, Kelfred Holdings' HK$27m in cash burn equates to about 9.8% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is Kelfred Holdings' Cash Burn A Worry?

Kelfred Holdings appears to be in pretty good health when it comes to its cash burn situation. One the one hand we have its solid revenue growth, while on the other it can also boast very strong cash burn relative to its market cap. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Kelfred Holdings' situation. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Kelfred Holdings (1 is significant!) that you should be aware of before investing here.

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

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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.