Companies Like Huili Resources (Group) (HKG:1303) Are In A Position To Invest In Growth

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, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. 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 Huili Resources (Group) (HKG:1303) shareholders should be worried about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Huili Resources (Group)

Does Huili Resources (Group) Have A Long Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at June 2020, Huili Resources (Group) had cash of CN¥204m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through CN¥33m. That means it had a cash runway of about 6.2 years as of June 2020. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.

Is Huili Resources (Group)'s Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Huili Resources (Group) actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Pleasingly, the company produced stunning operating revenue growth of 231% over the last year. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic revenue growth shows how Huili Resources (Group) is building its business over time.

Can Huili Resources (Group) Raise More Cash Easily?

While Huili Resources (Group)'s revenue growth truly does shine bright, it's important not to ignore the possibility that it might need more cash, at some point, even if only to optimise its growth plans. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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).

Huili Resources (Group)'s cash burn of CN¥33m is about 16% of its CN¥202m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

So, Should We Worry About Huili Resources (Group)'s Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Huili Resources (Group) is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. On this analysis its cash burn relative to its market cap was its weakest feature, but we are not concerned about it. 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. Taking an in-depth view of risks, we've identified 2 warning signs for Huili Resources (Group) that you should be aware of before investing.

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.

If you decide to trade Huili Resources (Group), use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.