Kingkey Intelligence Culture Holdings (HKG:550) Will Have To Spend Its Cash Wisely

There's no doubt that money can be made by owning shares of unprofitable businesses. By way of example, Kingkey Intelligence Culture Holdings (HKG:550) has seen its share price rise 149% over the last year, delighting many shareholders. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given its strong share price performance, we think it's worthwhile for Kingkey Intelligence Culture Holdings shareholders to consider whether its cash burn is concerning. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Kingkey Intelligence Culture Holdings

When Might Kingkey Intelligence Culture Holdings Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Kingkey Intelligence Culture Holdings last reported its balance sheet in June 2023, it had zero debt and cash worth HK$26m. Looking at the last year, the company burnt through HK$46m. So it had a cash runway of approximately 7 months from June 2023. 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. The image below shows how its cash balance has been changing over the last few years.

How Well Is Kingkey Intelligence Culture Holdings Growing?

It was quite stunning to see that Kingkey Intelligence Culture Holdings increased its cash burn by 536% over the last year. While that's concerning on it's own, the fact that operating revenue was actually down 6.2% over the same period makes us positively tremulous. Considering these two factors together makes us nervous about the direction the company seems to be heading. 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 has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For Kingkey Intelligence Culture Holdings To Raise More Cash For Growth?

Given its revenue and free cash flow are both moving in the wrong direction, shareholders may well be wondering how easily Kingkey Intelligence Culture Holdings could raise cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Kingkey Intelligence Culture Holdings has a market capitalisation of HK$200m and burnt through HK$46m last year, which is 23% of the company's market value. 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.

So, Should We Worry About Kingkey Intelligence Culture Holdings' Cash Burn?

We must admit that we don't think Kingkey Intelligence Culture Holdings is in a very strong position, when it comes to its cash burn. Although we can understand if some shareholders find its cash burn relative to its market cap acceptable, we can't ignore the fact that we consider its increasing cash burn to be downright troublesome. 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, Kingkey Intelligence Culture Holdings has 2 warning signs (and 1 which can't be ignored) we think 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.