We Think Wisdom Sports Group (HKG:1661) Needs To Drive Business Growth Carefully

Just because a business does not make any money, does not mean that the stock will go down. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Wisdom Sports Group (HKG:1661) shareholders be worried about its cash burn? In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Wisdom Sports Group

When Might Wisdom Sports Group Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Wisdom Sports Group last reported its balance sheet in June 2020, it had zero debt and cash worth CN¥236m. In the last year, its cash burn was CN¥72m. So it had a cash runway of about 3.3 years from June 2020. A runway of this length affords the company the time and space it needs to develop the business. You can see how its cash balance has changed over time in the image below.

How Well Is Wisdom Sports Group Growing?

Notably, Wisdom Sports Group actually ramped up its cash burn very hard and fast in the last year, by 190%, signifying heavy investment in the business. And that is all the more of a concern in light of the fact that operating revenue was actually down by 67% in the last year, as the company no doubt scrambles to change its fortunes. 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 Wisdom Sports Group has developed its business over time by checking this visualization of its revenue and earnings history.

Can Wisdom Sports Group Raise More Cash Easily?

Wisdom Sports Group seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Wisdom Sports Group's cash burn of CN¥72m is about 22% of its CN¥320m market capitalisation. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

Is Wisdom Sports Group's Cash Burn A Worry?

On this analysis of Wisdom Sports Group's cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. 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. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Wisdom Sports Group (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

Of course Wisdom Sports Group 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 that insiders are buying.

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This article by Simply Wall St is general in nature. 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.
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