Stock Analysis

Is Gogox Holdings (HKG:2246) In A Good Position To Invest In Growth?

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SEHK:2246
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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?

Given this risk, we thought we'd take a look at whether Gogox Holdings (HKG:2246) shareholders should 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). Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Gogox Holdings

When Might Gogox Holdings 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. In June 2023, Gogox Holdings had CN¥470m in cash, and was debt-free. In the last year, its cash burn was CN¥283m. So it had a cash runway of approximately 20 months from June 2023. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
SEHK:2246 Debt to Equity History December 6th 2023

How Well Is Gogox Holdings Growing?

It was fairly positive to see that Gogox Holdings reduced its cash burn by 20% during the last year. And operating revenue was up by 13% too. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

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

While Gogox Holdings 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. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

Gogox Holdings' cash burn of CN¥283m is about the same as its market capitalisation of CN¥284m. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.

So, Should We Worry About Gogox Holdings' Cash Burn?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Gogox Holdings' cash runway was relatively promising. Summing up, we think the Gogox Holdings' cash burn is a risk, based on the factors we mentioned in this article. On another note, we conducted an in-depth investigation of the company, and identified 2 warning signs for Gogox Holdings (1 is concerning!) that you should be aware of before investing here.

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.

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