Here's Why Values Cultural Investment (HKG:1740) Must Use Its Cash Wisely

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

So, the natural question for Values Cultural Investment (HKG:1740) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. 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 Values Cultural Investment

How Long Is Values Cultural Investment'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. When Values Cultural Investment last reported its balance sheet in June 2022, it had zero debt and cash worth CN¥83m. In the last year, its cash burn was CN¥80m. That means it had a cash runway of around 12 months as of June 2022. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time.

Is Values Cultural Investment's Revenue Growing?

Given that Values Cultural Investment actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. Unfortunately, the last year has been a disappointment, with operating revenue dropping 45% during the period. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Values Cultural Investment is building its business over time.

How Hard Would It Be For Values Cultural Investment To Raise More Cash For Growth?

Since its revenue growth is moving in the wrong direction, Values Cultural Investment shareholders may wish to think ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.

Values Cultural Investment's cash burn of CN¥80m is about 57% of its CN¥140m market capitalisation. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.

So, Should We Worry About Values Cultural Investment's Cash Burn?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Values Cultural Investment's cash runway was relatively promising. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. On another note, Values Cultural Investment has 2 warning signs (and 1 which is potentially serious) we think you should know about.

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.