We Think Universe Entertainment and Culture Group (HKG:1046) Can Easily Afford To Drive Business Growth

We can readily understand why investors are attracted to unprofitable companies. 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 Universe Entertainment and Culture Group (HKG:1046) 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Universe Entertainment and Culture Group

When Might Universe Entertainment and Culture Group Run Out Of Money?

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 December 2023, Universe Entertainment and Culture Group had HK$177m in cash, and was debt-free. In the last year, its cash burn was HK$6.6m. That means it had a cash runway of very many years as of December 2023. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Universe Entertainment and Culture Group Growing?

Universe Entertainment and Culture Group managed to reduce its cash burn by 95% over the last twelve months, which is extremely promising, when it comes to considering its need for cash. But it was even more encouraging to see that operating revenue growth was as flash as a rat with a gold tooth, up 338% in that time. Considering these factors, we're fairly impressed by its growth trajectory. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Universe Entertainment and Culture Group is growing revenue over time by checking this visualization of past revenue growth.

How Easily Can Universe Entertainment and Culture Group Raise Cash?

While Universe Entertainment and Culture 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Universe Entertainment and Culture Group's cash burn of HK$6.6m is about 2.4% of its HK$272m market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

So, Should We Worry About Universe Entertainment and Culture Group's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Universe Entertainment and Culture Group is burning through its cash. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. And even its cash burn relative to its market cap was very encouraging. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Taking a deeper dive, we've spotted 2 warning signs for Universe Entertainment and Culture Group you should be aware of, and 1 of them is a bit unpleasant.

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.