China Hanya Group Holdings Limited (SEHK:8312) continues its loss-making streak, announcing negative earnings for its latest financial year ending. Savvy investors should always reassess the situation of loss-making companies frequently, and keep informed about whether or not these businesses are in a strong cash position. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that China Hanya Group Holdings is spending more money than it earns, it will need to fund its expenses via external sources of capital. Looking at China Hanya Group Holdings’s latest financial data, I will gauge when the company may run out of cash and need to raise more money. View our latest analysis for China Hanya Group Holdings
What is cash burn?
China Hanya Group Holdings currently has HK$15.48M in the bank, with negative cash flows from operations of -HK$24.14M. Since it is spending more money than it makes, the business is “burning” through its cash to run its day-to-day operations. How fast China Hanya Group Holdings runs down its cash supply over time is known as the cash burn rate. The riskiest factor facing investors of the company is the potential for the company to run out of cash without the ability to raise more money, i.e. the company goes out of business. China Hanya Group Holdings operates in the distributors industry, which has an average EPS of HK$0.29, meaning the majority of its peers are profitable. China Hanya Group Holdings faces the trade-off between running the risk of depleting its cash reserves too fast, or risk falling behind its profitable competitors by investing too slowly.
When will China Hanya Group Holdings need to raise more cash?
China Hanya Group Holdings has to pay its employees and other necessities such as rent and admin costs in order to keep its business running. These costs are called operational expenses, which is sometimes shortened to opex. In this calculation I’ve only included recurring sales, general and admin (SG&A) expenses, and R&D expenses occured within they year. Opex (excluding one-offs) grew by 5.29% over the past year, which is relatively reasonable for a small-cap company. But, if China Hanya Group Holdings continues to ramp up its opex at this rate, given how much money it currently has in the bank, it will actually need to come to market again within the next year. Moreover, even if China Hanya Group Holdings kept its opex level at HK$17.49M, it will still have to come to market within the next year. Although this is a relatively simplistic calculation, and China Hanya Group Holdings may reduce its costs or open a new line of credit instead of issuing new equity shares, the outcome of this analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.
What this means for you:This analysis isn’t meant to deter you from China Hanya Group Holdings, but rather, to help you better understand the risks involved investing in loss-making companies. The outcome of my analysis suggests that if the company maintains the rate of opex growth, it will run out of cash within the year. An opportunity may exist for you to enter into the stock at an attractive price, should China Hanya Group Holdings come to market to fund its operations. I admit this is a fairly basic analysis for 8312’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research China Hanya Group Holdings to get a more holistic view of the company by looking at:
- 1. Historical Performance: What has 8312’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on China Hanya Group Holdings’s board and the CEO’s back ground.
- 3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.