Companies Like China Netcom Technology Holdings (HKG:8071) Are In A Position To Invest In Growth

Just because a business does not make any money, does not mean that the stock will go down. 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.

So should China Netcom Technology Holdings (HKG:8071) shareholders be worried about its 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. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for China Netcom Technology Holdings

Does China Netcom Technology Holdings Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When China Netcom Technology Holdings last reported its balance sheet in June 2021, it had zero debt and cash worth HK$56m. In the last year, its cash burn was HK$29m. Therefore, from June 2021 it had roughly 23 months of cash runway. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. You can see how its cash balance has changed over time in the image below.

Is China Netcom Technology Holdings' Revenue Growing?

Given that China Netcom Technology Holdings actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. We think that it's fairly positive to see that revenue grew 46% in the last twelve months. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how China Netcom Technology Holdings is growing revenue over time by checking this visualization of past revenue growth.

How Easily Can China Netcom Technology Holdings Raise Cash?

Notwithstanding China Netcom Technology Holdings' revenue growth, it is still important to consider how it could raise more money, if it needs to. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

China Netcom Technology Holdings has a market capitalisation of HK$192m and burnt through HK$29m last year, which is 15% of the company's market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

So, Should We Worry About China Netcom Technology Holdings' Cash Burn?

The good news is that in our view China Netcom Technology Holdings' cash burn situation gives shareholders real reason for optimism. One the one hand we have its solid cash runway, while on the other it can also boast very strong revenue growth. 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. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for China Netcom Technology Holdings that potential shareholders should take into account before putting money into a stock.

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)

When trading stocks or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.