Good Fellow Healthcare Holdings (HKG:8143) Will Have To Spend Its Cash Wisely

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Good Fellow Healthcare Holdings (HKG:8143) 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'.

See our latest analysis for Good Fellow Healthcare Holdings

Does Good Fellow Healthcare Holdings Have A Long Cash Runway?

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 September 2021, Good Fellow Healthcare Holdings had cash of HK$33m and no debt. In the last year, its cash burn was HK$52m. So it had a cash runway of approximately 8 months from September 2021. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Good Fellow Healthcare Holdings Growing?

One thing for shareholders to keep front in mind is that Good Fellow Healthcare Holdings increased its cash burn by 493% in the last twelve months. As if that's not bad enough, the operating revenue also dropped by 13%, making us very wary indeed. Considering these two factors together makes us nervous about the direction the company seems to be heading. 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 Good Fellow Healthcare Holdings is building its business over time.

Can Good Fellow Healthcare Holdings Raise More Cash Easily?

Since Good Fellow Healthcare Holdings' revenue is down, and its cash burn is up, shareholders would quite reasonably be considering whether it can raise more money easily, if need be. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Good Fellow Healthcare Holdings' cash burn of HK$52m is about 33% of its HK$158m market capitalisation. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

How Risky Is Good Fellow Healthcare Holdings' Cash Burn Situation?

Good Fellow Healthcare Holdings is not in a great position when it comes to its cash burn situation. Although we can understand if some shareholders find its falling revenue acceptable, we can't ignore the fact that we consider its increasing cash burn to be downright troublesome. After considering the data discussed in this article, we don't have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon. On another note, Good Fellow Healthcare Holdings has 3 warning signs (and 1 which can't be ignored) we think you should know about.

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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.

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