China 33 Media Group Limited (HKG:8087) continues its loss-making streak, announcing negative earnings for its latest financial year ending. The single most important question to ask when you’re investing in a loss-making company is – will it need to raise cash again, and if so, when? This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that China 33 Media Group is spending more money than it earns, it will need to fund its expenses via external sources of capital. China 33 Media Group may need to come to market again, but the question is, when? Below, I’ve analysed the most recent financial data to help answer this question.
What is cash burn?
With a negative free cash flow of -CN¥3.9m, China 33 Media Group is chipping away at its CN¥35m cash reserves in order to run its business. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. China 33 Media Group operates in the publishing industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. China 33 Media Group faces the trade-off between running the risk of depleting its cash reserves too fast, or risk falling behind its profitable competitors by investing too slowly.
When will China 33 Media Group need to raise more cash?
We can measure China 33 Media Group’s ongoing cash expenditure requirements by looking at free cash flow, which I define as cash flow from operations minus fixed capital investment, is a measure of how much cash a company generates/loses each year.
Over the last twelve months, free cash outflows (excluding one-offs) increased by 48%, which is substantial. However, given the current levels of cash holdings, it seems that China 33 Media Group will not need further capital soon. The company may be able to continue investing at the same rate without having to issue equity or borrow within the next three years. Even though this is analysis is fairly basic, and China 33 Media Group still can cut its overhead in the near future, or open a new line of credit instead of issuing new shares, this analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.
Next Steps:Although China 33 Media Group’s cash burn is growing at a double-digit rate, investors can breathe easy knowing it probably won’t be raising money any time soon. Shareholders may be pleased to know this as it signals that the company still has a strong cash reserve, as well as less likelihood of share dilution from new capital raising. However, this analysis still doesn’t tell us when China 33 Media Group will become breakeven. I suggest you take a look at their expected revenue growth to determine the timing of future profitability as well. Keep in mind I haven’t considered other factors such as how 8087 is expected to perform in the future. You should continue to research China 33 Media Group to get a better picture of the company by looking at:
- Historical Performance: What has 8087’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on China 33 Media Group’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 31 December 2018. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.
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