There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should AGTech Holdings (HKG:8279) shareholders 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
How Long Is AGTech Holdings' Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When AGTech Holdings last reported its balance sheet in December 2021, it had zero debt and cash worth HK$1.6b. Importantly, its cash burn was HK$29m over the trailing twelve months. So it had a very long cash runway of many years from December 2021. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. The image below shows how its cash balance has been changing over the last few years.
How Well Is AGTech Holdings Growing?
AGTech Holdings managed to reduce its cash burn by 71% over the last twelve months, which suggests it's on the right flight path. And there's no doubt that the inspiriting revenue growth of 57% assisted in that improvement. Overall, we'd say its growth is rather impressive. In reality, this article only makes a short study of the company's growth data. This graph of historic revenue growth shows how AGTech Holdings is building its business over time.
Can AGTech Holdings Raise More Cash Easily?
There's no doubt AGTech Holdings seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. 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. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
AGTech Holdings' cash burn of HK$29m is about 0.8% of its HK$3.4b market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
How Risky Is AGTech Holdings' Cash Burn Situation?
As you can probably tell by now, we're not too worried about AGTech Holdings' cash burn. For example, we think its revenue growth suggests that the company is on a good path. And even its cash burn reduction was very encouraging. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. On another note, AGTech Holdings has 2 warning signs (and 1 which is a bit unpleasant) 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. 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.