Companies Like Prime Intelligence Solutions Group (HKG:8379) 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, Prime Intelligence Solutions Group (HKG:8379) shareholders have done very well over the last year, with the share price soaring by 280%. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

In light of its strong share price run, we think now is a good time to investigate how risky Prime Intelligence Solutions Group's cash burn is. 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 Prime Intelligence Solutions Group

When Might Prime Intelligence Solutions Group Run Out Of Money?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Prime Intelligence Solutions Group last reported its balance sheet in September 2021, it had zero debt and cash worth HK$49m. Looking at the last year, the company burnt through HK$13m. Therefore, from September 2021 it had 3.7 years of cash runway. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.

How Well Is Prime Intelligence Solutions Group Growing?

It was quite stunning to see that Prime Intelligence Solutions Group increased its cash burn by 7,849% over the last year. That's not ideal, but we're made even more nervous given that operating revenue was flat over the same period. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Prime Intelligence Solutions Group has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Prime Intelligence Solutions Group Raise Cash?

While Prime Intelligence Solutions Group seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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).

Prime Intelligence Solutions Group's cash burn of HK$13m is about 7.4% of its HK$179m 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.

How Risky Is Prime Intelligence Solutions Group's Cash Burn Situation?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Prime Intelligence Solutions Group's cash runway was relatively promising. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Taking a deeper dive, we've spotted 3 warning signs for Prime Intelligence Solutions Group you should be aware of, and 1 of them makes us a bit uncomfortable.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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.

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