Here's Why We're Not At All Concerned With Hailiang International Holdings' (HKG:2336) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given this risk, we thought we'd take a look at whether Hailiang International Holdings (HKG:2336) shareholders should 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.

See our latest analysis for Hailiang International Holdings

Does Hailiang International Holdings Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In June 2022, Hailiang International Holdings had HK$95m in cash, and was debt-free. In the last year, its cash burn was HK$9.6m. That means it had a cash runway of about 9.9 years as of June 2022. 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. You can see how its cash balance has changed over time in the image below.

How Well Is Hailiang International Holdings Growing?

It was fairly positive to see that Hailiang International Holdings reduced its cash burn by 41% during the last year. But the operating revenue growth of 128% was even better. It seems to be growing nicely. In reality, this article only makes a short study of the company's growth data. You can take a look at how Hailiang International Holdings is growing revenue over time by checking this visualization of past revenue growth.

Can Hailiang International Holdings Raise More Cash Easily?

There's no doubt Hailiang International 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. Companies can raise capital through either debt or equity. 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.

Hailiang International Holdings' cash burn of HK$9.6m is about 4.4% of its HK$218m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

Is Hailiang International Holdings' Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Hailiang International Holdings is burning through its cash. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. Its cash burn reduction wasn't quite as good, but was still rather 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. Taking a deeper dive, we've spotted 3 warning signs for Hailiang International Holdings you should be aware of, and 1 of them is concerning.

Of course Hailiang International 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. 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.