Yi-Lai Berhad (KLSE:YILAI) Is In A Strong Position To Grow Its Business

There's no doubt that money can be made by owning shares of unprofitable businesses. 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 Yi-Lai Berhad (KLSE:YILAI) shareholders should be worried about its 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.

See our latest analysis for Yi-Lai Berhad

How Long Is Yi-Lai Berhad's 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. When Yi-Lai Berhad last reported its balance sheet in September 2020, it had zero debt and cash worth RM78m. Looking at the last year, the company burnt through RM467k. That means it had a cash runway of very many years as of September 2020. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.

Is Yi-Lai Berhad's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Yi-Lai Berhad actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 11%. In reality, this article only makes a short study of the company's growth data. You can take a look at how Yi-Lai Berhad has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Yi-Lai Berhad Raise Cash?

Since its revenue growth is moving in the wrong direction, Yi-Lai Berhad shareholders may wish to think ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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.

Yi-Lai Berhad's cash burn of RM467k is about 0.4% of its RM130m market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

So, Should We Worry About Yi-Lai Berhad's Cash Burn?

As you can probably tell by now, we're not too worried about Yi-Lai Berhad's cash burn. For example, we think its cash runway suggests that the company is on a good path. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. On another note, we conducted an in-depth investigation of the company, and identified 2 warning signs for Yi-Lai Berhad (1 is a bit concerning!) that you should be aware of before investing here.

Of course Yi-Lai Berhad 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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