We're Not Very Worried About Sinofortune Financial Holdings' (HKG:8123) Cash Burn Rate

Just because a business does not make any money, does not mean that the stock will go down. Indeed, Sinofortune Financial Holdings (HKG:8123) stock is up 140% in the last year, providing strong gains for shareholders. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given its strong share price performance, we think it's worthwhile for Sinofortune Financial Holdings shareholders to consider whether its cash burn is concerning. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called 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 Sinofortune Financial Holdings

Does Sinofortune Financial Holdings Have A Long 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. As at December 2020, Sinofortune Financial Holdings had cash of HK$95m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through HK$23m. So it had a cash runway of about 4.2 years from December 2020. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.

Is Sinofortune Financial Holdings' Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Sinofortune Financial Holdings actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. The bad news for shareholders is that operating revenue actually plummeted 86% in the last year, which is a real concern in our view. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Sinofortune Financial Holdings is building its business over time.

How Hard Would It Be For Sinofortune Financial Holdings To Raise More Cash For Growth?

Given its problematic fall in revenue, Sinofortune Financial Holdings shareholders should consider how the company could fund its growth, if it turns out it needs more cash. 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. 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.

Sinofortune Financial Holdings' cash burn of HK$23m is about 12% of its HK$186m market capitalisation. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

Is Sinofortune Financial Holdings' Cash Burn A Worry?

On this analysis of Sinofortune Financial Holdings' cash burn, we think its cash runway was reassuring, while its falling revenue has us a bit worried. 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. An in-depth examination of risks revealed 2 warning signs for Sinofortune Financial Holdings that readers should think about before committing capital to this stock.

Of course Sinofortune Financial Holdings 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. 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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