We're Hopeful That New Century Healthcare Holding (HKG:1518) Will Use Its Cash Wisely

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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should New Century Healthcare Holding (HKG:1518) shareholders 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for New Century Healthcare Holding

When Might New Century Healthcare Holding Run Out Of Money?

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. As at December 2020, New Century Healthcare Holding had cash of CN¥302m and no debt. In the last year, its cash burn was CN¥19m. So it had a very long cash runway of many years from December 2020. 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. You can see how its cash balance has changed over time in the image below.

Is New Century Healthcare Holding's Revenue Growing?

Given that New Century Healthcare Holding 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. Unfortunately, the last year has been a disappointment, with operating revenue dropping 30% during the period. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how New Century Healthcare Holding is building its business over time.

How Easily Can New Century Healthcare Holding Raise Cash?

Given its problematic fall in revenue, New Century Healthcare Holding shareholders should consider how the company could fund its growth, if it turns out it needs 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.

New Century Healthcare Holding's cash burn of CN¥19m is about 3.7% of its CN¥503m 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 New Century Healthcare Holding's Cash Burn?

As you can probably tell by now, we're not too worried about New Century Healthcare Holding's cash burn. For example, we think its cash runway suggests that the company is on a good path. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. 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. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for New Century Healthcare Holding (1 shouldn't be ignored!) 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 interesting companies, 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. 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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