We Think Hailiang International Holdings (HKG:2336) Can Easily Afford To Drive Business Growth

Just because a business does not make any money, does not mean that the stock will go down. 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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Hailiang International Holdings (HKG:2336) shareholders be worried about its cash burn? 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Hailiang International Holdings

When Might Hailiang International Holdings Run Out Of Money?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Hailiang International Holdings last reported its balance sheet in June 2022, it had zero debt and cash worth HK$95m. In the last year, its cash burn was HK$10.0m. So it had a cash runway of about 9.5 years from June 2022. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.

How Well Is Hailiang International Holdings Growing?

We reckon the fact that Hailiang International Holdings managed to shrink its cash burn by 39% over the last year is rather encouraging. But the operating revenue growth of 128% was even better. We think it is growing rather well, upon reflection. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic revenue growth shows how Hailiang International Holdings is building its business over time.

How Hard Would It Be For Hailiang International Holdings To Raise More Cash For Growth?

We are certainly impressed with the progress Hailiang International Holdings has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Hailiang International Holdings' cash burn of HK$10.0m is about 3.9% of its HK$254m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

So, Should We Worry About Hailiang International Holdings' Cash Burn?

As you can probably tell by now, we're not too worried about Hailiang International Holdings' cash burn. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. And even though its cash burn reduction wasn't quite as impressive, it was still a positive. 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, we conducted an in-depth investigation of the company, and identified 2 warning signs for Hailiang International Holdings (1 is potentially serious!) that you should be aware of before investing here.

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.