We're Not Very Worried About Lajin Entertainment Network Group's (HKG:8172) Cash Burn Rate

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. Indeed, Lajin Entertainment Network Group (HKG:8172) stock is up 117% in the last year, providing strong gains for shareholders. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

In light of its strong share price run, we think now is a good time to investigate how risky Lajin Entertainment Network Group's cash burn is. 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Lajin Entertainment Network Group

How Long Is Lajin Entertainment Network Group's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Lajin Entertainment Network Group last reported its balance sheet in June 2020, it had zero debt and cash worth HK$117m. Importantly, its cash burn was HK$32m over the trailing twelve months. That means it had a cash runway of about 3.6 years as of June 2020. A runway of this length affords the company the time and space it needs to develop the business. You can see how its cash balance has changed over time in the image below.

How Well Is Lajin Entertainment Network Group Growing?

It was fairly positive to see that Lajin Entertainment Network Group reduced its cash burn by 46% during the last year. But it makes us pessimistic to see that operating revenue slid 52% in that time. Considering both these factors, we're not particularly excited by its growth profile. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Lajin Entertainment Network Group has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Lajin Entertainment Network Group Raise Cash?

Lajin Entertainment Network Group seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Since it has a market capitalisation of HK$791m, Lajin Entertainment Network Group's HK$32m in cash burn equates to about 4.1% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

So, Should We Worry About Lajin Entertainment Network Group's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Lajin Entertainment Network Group is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. While we must concede that its falling revenue is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. On another note, Lajin Entertainment Network Group has 4 warning signs (and 1 which makes us a bit uncomfortable) 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 companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

If you decide to trade Lajin Entertainment Network Group, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.