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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Lajin Entertainment Network Group (HKG:8172) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for Lajin Entertainment Network Group

Does Lajin Entertainment Network Group Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Lajin Entertainment Network Group last reported its June 2023 balance sheet in November 2023, it had zero debt and cash worth HK$30m. Importantly, its cash burn was HK$13m over the trailing twelve months. That means it had a cash runway of about 2.4 years as of June 2023. Arguably, that's a prudent and sensible length of runway to have. The image below shows how its cash balance has been changing over the last few years.

How Well Is Lajin Entertainment Network Group Growing?

We reckon the fact that Lajin Entertainment Network Group managed to shrink its cash burn by 48% over the last year is rather encouraging. Unfortunately, however, operating revenue declined by 3.1% during the period. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. In reality, this article only makes a short study of the company's growth data. 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.

Can Lajin Entertainment Network Group Raise More Cash Easily?

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. 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.

Lajin Entertainment Network Group has a market capitalisation of HK$269m and burnt through HK$13m last year, which is 4.8% 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 Lajin Entertainment Network Group's Cash Burn?

As you can probably tell by now, we're not too worried about Lajin Entertainment Network Group's cash burn. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. While its falling revenue wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Taking a deeper dive, we've spotted 3 warning signs for Lajin Entertainment Network Group you should be aware of, and 1 of them is potentially serious.

Of course Lajin Entertainment Network Group 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.