Is Inch Kenneth Kajang Rubber (KLSE:INCKEN) In A Good Position To Invest In Growth?

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Inch Kenneth Kajang Rubber (KLSE:INCKEN) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Inch Kenneth Kajang Rubber

When Might Inch Kenneth Kajang Rubber Run Out Of Money?

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 September 2020, Inch Kenneth Kajang Rubber had cash of RM31m and no debt. In the last year, its cash burn was RM33m. That means it had a cash runway of around 11 months as of September 2020. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.

Is Inch Kenneth Kajang Rubber's Revenue Growing?

Given that Inch Kenneth Kajang Rubber actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 24%. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Inch Kenneth Kajang Rubber is building its business over time.

How Hard Would It Be For Inch Kenneth Kajang Rubber To Raise More Cash For Growth?

Since its revenue growth is moving in the wrong direction, Inch Kenneth Kajang Rubber shareholders may wish to think ahead to when the company may need to raise more cash. 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).

Inch Kenneth Kajang Rubber's cash burn of RM33m is about 17% of its RM191m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

Is Inch Kenneth Kajang Rubber's Cash Burn A Worry?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Inch Kenneth Kajang Rubber's cash burn relative to its market cap was relatively promising. Summing up, we think the Inch Kenneth Kajang Rubber's 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 5 warning signs for Inch Kenneth Kajang Rubber (2 can't be ignored!) 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)

If you decide to trade Inch Kenneth Kajang Rubber, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.