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

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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given this risk, we thought we'd take a look at whether Lajin Entertainment Network Group (HKG:8172) shareholders should be worried about its cash burn. 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.

View our latest analysis for Lajin Entertainment Network Group

How Long Is Lajin Entertainment Network Group's 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 Lajin Entertainment Network Group last reported its balance sheet in June 2022, it had zero debt and cash worth HK$44m. In the last year, its cash burn was HK$30m. So it had a cash runway of approximately 18 months from June 2022. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Lajin Entertainment Network Group Growing?

It was fairly positive to see that Lajin Entertainment Network Group reduced its cash burn by 45% during the last year. But it makes us pessimistic to see that operating revenue slid 78% in that time. 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 Lajin Entertainment Network Group is building its business over time.

How Hard Would It Be For Lajin Entertainment Network Group To Raise More Cash For Growth?

Even though it seems like Lajin Entertainment Network Group is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. 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.

Lajin Entertainment Network Group's cash burn of HK$30m is about 6.0% of its HK$501m market capitalisation. 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.

How Risky Is Lajin Entertainment Network Group's Cash Burn Situation?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Lajin Entertainment Network Group's cash burn relative to its market cap was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Lajin Entertainment Network Group's situation. On another note, Lajin Entertainment Network Group has 3 warning signs (and 1 which is potentially serious) we think you should know about.

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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.