We're Hopeful That Good Fellow Healthcare Holdings (HKG:8143) Will Use Its Cash Wisely

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Good Fellow Healthcare Holdings

When Might Good Fellow Healthcare Holdings 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 September 2022, Good Fellow Healthcare Holdings had cash of HK$21m and no debt. Importantly, its cash burn was HK$14m over the trailing twelve months. That means it had a cash runway of around 19 months as of September 2022. 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. You can see how its cash balance has changed over time in the image below.

How Well Is Good Fellow Healthcare Holdings Growing?

Good Fellow Healthcare Holdings managed to reduce its cash burn by 74% over the last twelve months, which suggests it's on the right flight path. Unfortunately, however, operating revenue dropped 2.5% during the same time frame. We think it is growing rather well, upon reflection. In reality, this article only makes a short study of the company's growth data. You can take a look at how Good Fellow Healthcare Holdings has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Good Fellow Healthcare Holdings Raise Cash?

Good Fellow Healthcare Holdings seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Companies can raise capital through either debt or equity. 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.

Good Fellow Healthcare Holdings' cash burn of HK$14m is about 8.6% of its HK$158m market capitalisation. 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 Good Fellow Healthcare Holdings' Cash Burn A Worry?

On this analysis of Good Fellow Healthcare Holdings' cash burn, we think its cash burn reduction was reassuring, while its falling revenue has us a bit worried. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Good Fellow Healthcare Holdings (1 is concerning!) that you should be aware of before investing here.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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.