We Think Universe Entertainment and Culture Group (HKG:1046) Needs To Drive Business Growth Carefully

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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

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. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let's start with an examination of the business' cash, relative to its cash burn.

Our free stock report includes 4 warning signs investors should be aware of before investing in Universe Entertainment and Culture Group. Read for free now.

How Long Is Universe Entertainment and Culture Group's Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at December 2024, Universe Entertainment and Culture Group had cash of HK$116m and no debt. In the last year, its cash burn was HK$46m. That means it had a cash runway of about 2.5 years as of December 2024. That's decent, giving the company a couple years to develop its business. Depicted below, you can see how its cash holdings have changed over time.

View our latest analysis for Universe Entertainment and Culture Group

How Well Is Universe Entertainment and Culture Group Growing?

It was quite stunning to see that Universe Entertainment and Culture Group increased its cash burn by 601% over the last year. As if that's not bad enough, the operating revenue also dropped by 33%, making us very wary indeed. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. In reality, this article only makes a short study of the company's growth data. You can take a look at how Universe Entertainment and Culture Group has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For Universe Entertainment and Culture Group To Raise More Cash For Growth?

While Universe Entertainment and Culture Group seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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$46m is about 8.5% of its HK$544m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

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

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Universe Entertainment and Culture Group's cash runway was relatively promising. 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 Universe Entertainment and Culture Group's situation. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Universe Entertainment and Culture Group (of which 3 are significant!) you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies with significant insider holdings, 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.