We Think Gogox Holdings (HKG:2246) Needs To Drive Business Growth Carefully

We can readily understand why investors are attracted to unprofitable companies. 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 Gogox Holdings (HKG:2246) shareholders 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Gogox Holdings

Does Gogox Holdings Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2023, Gogox Holdings had CN¥414m in cash, and was debt-free. Importantly, its cash burn was CN¥174m over the trailing twelve months. Therefore, from December 2023 it had 2.4 years of cash runway. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.

How Well Is Gogox Holdings Growing?

We reckon the fact that Gogox Holdings managed to shrink its cash burn by 43% over the last year is rather encouraging. Unfortunately, however, operating revenue declined by 2.6% during the period. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Gogox Holdings is building its business over time.

How Easily Can Gogox Holdings Raise Cash?

Gogox Holdings seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. 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 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.

Since it has a market capitalisation of CN¥236m, Gogox Holdings' CN¥174m in cash burn equates to about 74% of its market value. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.

How Risky Is Gogox Holdings' Cash Burn Situation?

On this analysis of Gogox Holdings' cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Gogox Holdings (of which 1 makes us a bit uncomfortable!) you should know about.

Of course Gogox 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 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.