We're Interested To See How Kuaishou Technology (HKG:1024) Uses Its Cash Hoard To Grow

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Kuaishou Technology (HKG:1024) 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. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Kuaishou Technology

How Long Is Kuaishou Technology's 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. As at March 2021, Kuaishou Technology had cash of CN¥61b and no debt. Looking at the last year, the company burnt through CN¥5.7b. So it had a very long cash runway of many years from March 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. The image below shows how its cash balance has been changing over the last few years.

Is Kuaishou Technology's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Kuaishou Technology actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. As it happens, shareholders have good reason to be optimistic about the future since the company increased its operating revenue by 62% over the last year. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can Kuaishou Technology Raise More Cash Easily?

While Kuaishou Technology'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. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.

Kuaishou Technology has a market capitalisation of CN¥724b and burnt through CN¥5.7b last year, which is 0.8% of the company's market value. 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.

So, Should We Worry About Kuaishou Technology's Cash Burn?

As you can probably tell by now, we're not too worried about Kuaishou Technology's cash burn. For example, we think its revenue growth suggests that the company is on a good path. But it's fair to say that its cash burn relative to its market cap was also very reassuring. 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. An in-depth examination of risks revealed 1 warning sign for Kuaishou Technology that readers should think about before committing capital to this stock.

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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