Here's Why Kaisa Health Group Holdings (HKG:876) Must Use 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. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given this risk, we thought we'd take a look at whether Kaisa Health Group Holdings (HKG:876) shareholders should 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 Kaisa Health Group Holdings

When Might Kaisa Health Group Holdings Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2022, Kaisa Health Group Holdings had cash of HK$202m and no debt. Looking at the last year, the company burnt through HK$262m. That means it had a cash runway of around 9 months as of June 2022. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. The image below shows how its cash balance has been changing over the last few years.

Is Kaisa Health Group Holdings' Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Kaisa Health Group Holdings actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 5.0%. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Kaisa Health Group Holdings is building its business over time.

Can Kaisa Health Group Holdings Raise More Cash Easily?

Given its problematic fall in revenue, Kaisa Health Group Holdings 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.

Since it has a market capitalisation of HK$363m, Kaisa Health Group Holdings' HK$262m in cash burn equates to about 72% of its market value. Given how large that cash burn is, relative to the market value of the entire company, we'd consider it to be a high risk stock, with the real possibility of extreme dilution.

So, Should We Worry About Kaisa Health Group Holdings' Cash Burn?

Kaisa Health Group 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 cash burn relative to its market cap 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. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Kaisa Health Group Holdings (of which 2 can't be ignored!) you should know about.

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. 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.