GPA Holdings Berhad (KLSE:GPA) 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given this risk, we thought we'd take a look at whether GPA Holdings Berhad (KLSE:GPA) 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.

View our latest analysis for GPA Holdings Berhad

How Long Is GPA Holdings Berhad's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2020, GPA Holdings Berhad had RM61m in cash, and was debt-free. Importantly, its cash burn was RM1.2m over the trailing twelve months. So it had a very long cash runway of many years from 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 GPA Holdings Berhad's Revenue Growing?

Given that GPA Holdings Berhad 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. Unfortunately, the last year has been a disappointment, with operating revenue dropping 13% during the period. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how GPA Holdings Berhad is building its business over time.

Can GPA Holdings Berhad Raise More Cash Easily?

Given its problematic fall in revenue, GPA Holdings Berhad shareholders should consider how the company could fund its growth, if it turns out it needs more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.

GPA Holdings Berhad's cash burn of RM1.2m is about 0.7% of its RM159m 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 GPA Holdings Berhad's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way GPA Holdings Berhad is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. While its falling revenue wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 3 warning signs for GPA Holdings Berhad that potential shareholders should take into account before putting money into a stock.

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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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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