Here's Why We're Not At All Concerned With Kingkey Intelligence Culture Holdings' (HKG:550) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. 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.

So, the natural question for Kingkey Intelligence Culture Holdings (HKG:550) 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). Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for Kingkey Intelligence Culture Holdings

Does Kingkey Intelligence Culture Holdings Have A Long 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. When Kingkey Intelligence Culture Holdings last reported its balance sheet in December 2022, it had zero debt and cash worth HK$78m. Looking at the last year, the company burnt through HK$7.6m. That means it had a cash runway of very many years as of December 2022. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.

How Well Is Kingkey Intelligence Culture Holdings Growing?

We reckon the fact that Kingkey Intelligence Culture Holdings managed to shrink its cash burn by 37% over the last year is rather encouraging. Having said that, the revenue growth of 55% was considerably more inspiring. We think it is growing rather well, upon reflection. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Kingkey Intelligence Culture Holdings is growing revenue over time by checking this visualization of past revenue growth.

Can Kingkey Intelligence Culture Holdings Raise More Cash Easily?

There's no doubt Kingkey Intelligence Culture Holdings seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund 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. 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.

Kingkey Intelligence Culture Holdings has a market capitalisation of HK$182m and burnt through HK$7.6m last year, which is 4.2% of the company's market value. 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 Kingkey Intelligence Culture Holdings' Cash Burn?

As you can probably tell by now, we're not too worried about Kingkey Intelligence Culture Holdings' cash burn. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. And even though its cash burn reduction wasn't quite as impressive, it was still a positive. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Separately, we looked at different risks affecting the company and spotted 2 warning signs for Kingkey Intelligence Culture Holdings (of which 1 is significant!) you should know about.

Of course Kingkey Intelligence Culture Holdings 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.