Is Doumob (HKG:1917) In A Good Position To Invest In Growth?

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. 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 Doumob (HKG:1917) shareholders should be worried about its 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). Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for Doumob

When Might Doumob Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2021, Doumob had CN¥60m in cash, and was debt-free. Importantly, its cash burn was CN¥62m over the trailing twelve months. So it had a cash runway of approximately 12 months from December 2021. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. You can see how its cash balance has changed over time in the image below.

How Well Is Doumob Growing?

Notably, Doumob actually ramped up its cash burn very hard and fast in the last year, by 152%, signifying heavy investment in the business. That's not ideal, but we're made even more nervous given that operating revenue was flat over the same period. Taken together, we think these growth metrics are a little worrying. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Doumob is building its business over time.

Can Doumob Raise More Cash Easily?

Given the trajectory of Doumob's cash burn, many investors will already be thinking about how it might raise more cash in the future. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.

Since it has a market capitalisation of CN¥171m, Doumob's CN¥62m in cash burn equates to about 36% of its market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

So, Should We Worry About Doumob's Cash Burn?

On this analysis of Doumob's cash burn, we think its revenue growth was reassuring, while its increasing cash burn has us a bit worried. 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, Doumob has 4 warning signs (and 2 which are a bit concerning) we think you should know about.

Of course Doumob 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. 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.