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

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, the natural question for Universe Entertainment and Culture Group (HKG:1046) shareholders is whether they should be concerned by its rate of cash burn. 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

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

A company's cash runway is calculated by dividing its cash hoard by its cash burn. 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. So it had a cash runway of about 2.5 years from December 2024. Arguably, that's a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.

Check out 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. Considering these two factors together makes us nervous about the direction the company seems to be heading. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Universe Entertainment and Culture Group is building its business over time.

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

Even though it seems like Universe Entertainment and Culture Group is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

Universe Entertainment and Culture Group's cash burn of HK$46m is about 15% of its HK$304m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

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. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Universe Entertainment and Culture Group (of which 3 make us uncomfortable!) you should know about.

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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.