Companies Like Beijing Health (Holdings) (HKG:2389) Are In A Position To Invest In 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?

So should Beijing Health (Holdings) (HKG:2389) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Beijing Health (Holdings)

When Might Beijing Health (Holdings) 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. In June 2023, Beijing Health (Holdings) had HK$391m in cash, and was debt-free. Importantly, its cash burn was HK$34m over the trailing twelve months. That means it had a cash runway of very many years as of June 2023. 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 Beijing Health (Holdings)'s Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Beijing Health (Holdings) 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 29% 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 Beijing Health (Holdings) is building its business over time.

How Hard Would It Be For Beijing Health (Holdings) To Raise More Cash For Growth?

Given its problematic fall in revenue, Beijing Health (Holdings) 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).

Beijing Health (Holdings) has a market capitalisation of HK$491m and burnt through HK$34m last year, which is 7.0% of the company's 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.

How Risky Is Beijing Health (Holdings)'s Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Beijing Health (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. 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 Beijing Health (Holdings) (1 is a bit concerning!) that you should be aware of before investing here.

Of course Beijing Health (Holdings) 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.