We're Not Very Worried About Huili Resources (Group)'s (HKG:1303) Cash Burn Rate

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, Huili Resources (Group) (HKG:1303) shareholders have done very well over the last year, with the share price soaring by 174%. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

In light of its strong share price run, we think now is a good time to investigate how risky Huili Resources (Group)'s cash burn is. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Huili Resources (Group)

When Might Huili Resources (Group) Run Out Of Money?

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 2021, Huili Resources (Group) had cash of CN¥136m and no debt. Importantly, its cash burn was CN¥38m over the trailing twelve months. Therefore, from June 2021 it had 3.5 years of cash runway. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.

How Well Is Huili Resources (Group) Growing?

At first glance it's a bit worrying to see that Huili Resources (Group) actually boosted its cash burn by 17%, year on year. Given that it boosted operating revenue by a stand-out 486% in the same period, we think management are simply more focussed on growth than preserving cash. It may well be that it has some excellent opportunities to invest in growth. It seems to be growing nicely. In reality, this article only makes a short study of the company's growth data. You can take a look at how Huili Resources (Group) is growing revenue over time by checking this visualization of past revenue growth.

How Hard Would It Be For Huili Resources (Group) To Raise More Cash For Growth?

While Huili Resources (Group) seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. 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 looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Huili Resources (Group) has a market capitalisation of CN¥269m and burnt through CN¥38m last year, which is 14% of the company's market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

How Risky Is Huili Resources (Group)'s Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Huili Resources (Group) is burning through its cash. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. 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. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 1 warning sign for Huili Resources (Group) that investors should know when investing in the stock.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

When trading stocks or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*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.