Here's Why We're Not Too Worried About HL Global Enterprises' (SGX:AVX) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. 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 HL Global Enterprises (SGX:AVX) 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 HL Global Enterprises

When Might HL Global Enterprises 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. In December 2021, HL Global Enterprises had S$55m in cash, and was debt-free. Importantly, its cash burn was S$1.3m over the trailing twelve months. So it had a very long cash runway of many years from December 2021. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. Depicted below, you can see how its cash holdings have changed over time.

How Well Is HL Global Enterprises Growing?

One thing for shareholders to keep front in mind is that HL Global Enterprises increased its cash burn by 999% in the last twelve months. While that's concerning on it's own, the fact that operating revenue was actually down 48% over the same period makes us positively tremulous. Considering these two factors together makes us nervous about the direction the company seems to be heading. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how HL Global Enterprises has developed its business over time by checking this visualization of its revenue and earnings history.

Can HL Global Enterprises Raise More Cash Easily?

HL Global Enterprises seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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).

Since it has a market capitalisation of S$28m, HL Global Enterprises' S$1.3m in cash burn equates to about 4.6% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

So, Should We Worry About HL Global Enterprises' Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought HL Global Enterprises' cash runway was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about HL Global Enterprises' situation. On another note, HL Global Enterprises has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.