We're Keeping An Eye On Pegasus Heights Berhad's (KLSE:PHB) Cash Burn Rate

We can readily understand why investors are attracted to unprofitable companies. For example, Pegasus Heights Berhad (KLSE:PHB) shareholders have done very well over the last year, with the share price soaring by 300%. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

In light of its strong share price run, we think now is a good time to investigate how risky Pegasus Heights Berhad's cash burn is. 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Pegasus Heights Berhad

When Might Pegasus Heights Berhad Run Out Of Money?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at December 2020, Pegasus Heights Berhad had cash of RM11m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through RM18m. That means it had a cash runway of around 7 months as of December 2020. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.

How Well Is Pegasus Heights Berhad Growing?

Some investors might find it troubling that Pegasus Heights Berhad is actually increasing its cash burn, which is up 13% in the last year. Given that it boosted operating revenue by a stand-out 338% in the same period, we think management are simply more focussed on growth than preserving cash. It may well be that it has some excellent opportunities to invest in growth. We think it is growing rather well, upon reflection. In reality, this article only makes a short study of the company's growth data. You can take a look at how Pegasus Heights Berhad is growing revenue over time by checking this visualization of past revenue growth.

How Easily Can Pegasus Heights Berhad Raise Cash?

Given the trajectory of Pegasus Heights Berhad's cash burn, many investors will already be thinking about how it might raise more cash in the future. Companies can raise capital through either debt or equity. 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.

Pegasus Heights Berhad has a market capitalisation of RM212m and burnt through RM18m last year, which is 8.5% of the company's market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

Is Pegasus Heights Berhad's Cash Burn A Worry?

On this analysis of Pegasus Heights Berhad's cash burn, we think its revenue growth was reassuring, while its cash runway 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. Taking a deeper dive, we've spotted 5 warning signs for Pegasus Heights Berhad you should be aware of, and 2 of them are concerning.

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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