Here's Why We're Not At All Concerned With BaWang International (Group) Holding's (HKG:1338) Cash Burn Situation

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, 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 BaWang International (Group) Holding (HKG:1338) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for BaWang International (Group) Holding

When Might BaWang International (Group) Holding Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When BaWang International (Group) Holding last reported its balance sheet in December 2021, it had zero debt and cash worth CN¥63m. Importantly, its cash burn was CN¥65k over the trailing twelve months. That means it had a cash runway of very many years as of December 2021. 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 BaWang International (Group) Holding's Revenue Growing?

Given that BaWang International (Group) 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. As it happens, operating revenue has been pretty flat over the last year. 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 BaWang International (Group) Holding is building its business over time.

How Hard Would It Be For BaWang International (Group) Holding To Raise More Cash For Growth?

Since its revenue growth is moving in the wrong direction, BaWang International (Group) Holding shareholders may wish to think ahead to when the company may need to raise 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. 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).

BaWang International (Group) Holding's cash burn of CN¥65k is about 0.04% of its CN¥180m market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

Is BaWang International (Group) Holding's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about BaWang International (Group) 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. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. On another note, BaWang International (Group) Holding has 3 warning signs (and 1 which can't be ignored) we think 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.