Is Frontier Services Group (HKG:500) In A Good Position To Deliver On Growth Plans?

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 Frontier Services Group (HKG:500) 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). Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Frontier Services Group

Does Frontier Services Group 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. As at June 2020, Frontier Services Group had cash of HK$286m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was HK$265m. So it had a cash runway of approximately 13 months from June 2020. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.

How Well Is Frontier Services Group Growing?

On balance, we think it's mildly positive that Frontier Services Group trimmed its cash burn by 16% over the last twelve months. Unfortunately, however, operating revenue declined by 25% during the period. In light of the data above, we're fairly sanguine about the business growth trajectory. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Frontier Services Group is building its business over time.

How Hard Would It Be For Frontier Services Group To Raise More Cash For Growth?

Since Frontier Services Group revenue has been falling, the market will likely be considering how it can raise more cash if need be. 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).

Frontier Services Group has a market capitalisation of HK$1.2b and burnt through HK$265m last year, which is 21% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

So, Should We Worry About Frontier Services Group's Cash Burn?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Frontier Services Group's cash burn reduction was relatively promising. Summing up, we think the Frontier Services Group's cash burn is a risk, based on the factors we mentioned in this article. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Frontier Services Group (of which 2 don't sit too well with us!) you should know about.

Of course Frontier Services Group 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. 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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