We Think Xiwang Property Holdings (HKG:2088) Can Afford To Drive Business Growth

We can readily understand why investors are attracted to unprofitable companies. 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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether Xiwang Property Holdings (HKG:2088) 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Xiwang Property Holdings

When Might Xiwang Property Holdings Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Xiwang Property Holdings last reported its balance sheet in December 2020, it had zero debt and cash worth CN¥144m. Importantly, its cash burn was CN¥2.3m over the trailing twelve months. So it had a very long cash runway of many years from December 2020. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.

Is Xiwang Property Holdings' Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Xiwang Property Holdings actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. The grim reality for shareholders is that operating revenue fell by 77% over the last twelve months, which is not what we want to see in a cash burning company. In reality, this article only makes a short study of the company's growth data. You can take a look at how Xiwang Property Holdings has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Xiwang Property Holdings Raise Cash?

Since its revenue growth is moving in the wrong direction, Xiwang Property Holdings shareholders may wish to think ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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 CN¥144m, Xiwang Property Holdings' CN¥2.3m in cash burn equates to about 1.6% of its market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

So, Should We Worry About Xiwang Property Holdings' Cash Burn?

As you can probably tell by now, we're not too worried about Xiwang Property Holdings' cash burn. 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. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. On another note, Xiwang Property Holdings has 4 warning signs (and 1 which shouldn't be ignored) 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)

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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.
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