Companies Like China Rare Earth Holdings (HKG:769) Are In A Position To Invest In Growth

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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should China Rare Earth Holdings (HKG:769) shareholders 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for China Rare Earth Holdings

How Long Is China Rare Earth Holdings' Cash Runway?

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. In June 2024, China Rare Earth Holdings had HK$1.0b in cash, and was debt-free. In the last year, its cash burn was HK$175m. Therefore, from June 2024 it had 6.0 years of cash runway. 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.

How Well Is China Rare Earth Holdings Growing?

It was fairly positive to see that China Rare Earth Holdings reduced its cash burn by 47% during the last year. Unfortunately, however, operating revenue declined by 23% during the period. On balance, we'd say the company is improving over time. In reality, this article only makes a short study of the company's growth data. You can take a look at how China Rare Earth Holdings has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For China Rare Earth Holdings To Raise More Cash For Growth?

There's no doubt China Rare Earth Holdings seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.

China Rare Earth Holdings has a market capitalisation of HK$773m and burnt through HK$175m last year, which is 23% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

How Risky Is China Rare Earth Holdings' Cash Burn Situation?

On this analysis of China Rare Earth Holdings' cash burn, we think its cash runway was reassuring, while its falling revenue has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about China Rare Earth Holdings' situation. Taking a deeper dive, we've spotted 2 warning signs for China Rare Earth Holdings you should be aware of, and 1 of them makes us a bit uncomfortable.

Of course China Rare Earth Holdings may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.