Sheen Tai Holdings Group (HKG:1335) Is In A Good Position To Deliver On Growth Plans

There's no doubt that money can be made by owning shares of unprofitable businesses. Indeed, Sheen Tai Holdings Group (HKG:1335) stock is up 151% in the last year, providing strong gains for shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given its strong share price performance, we think it's worthwhile for Sheen Tai Holdings Group 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Sheen Tai Holdings Group

How Long Is Sheen Tai Holdings Group's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Sheen Tai Holdings Group last reported its June 2024 balance sheet in September 2024, it had zero debt and cash worth HK$211m. In the last year, its cash burn was HK$8.1m. That means it had a cash runway of very many years as of June 2024. 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.

Is Sheen Tai Holdings Group's Revenue Growing?

Given that Sheen Tai Holdings Group 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. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 26%. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Sheen Tai Holdings Group has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Sheen Tai Holdings Group Raise Cash?

Given its problematic fall in revenue, Sheen Tai Holdings Group 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. 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).

Sheen Tai Holdings Group has a market capitalisation of HK$360m and burnt through HK$8.1m last year, which is 2.2% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

So, Should We Worry About Sheen Tai Holdings Group's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Sheen Tai Holdings Group is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. While its falling revenue wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. 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. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for Sheen Tai Holdings Group that investors should know when investing in the stock.

Of course Sheen Tai Holdings Group 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 with high insider ownership.

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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.