Companies Like G&E Herbal Biotechnology (GTSM:4911) Can Afford To Invest In Growth

By
Simply Wall St
Published
September 25, 2020
GTSM:4911

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should G&E Herbal Biotechnology (GTSM:4911) shareholders be worried about its cash burn? 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for G&E Herbal Biotechnology

Does G&E Herbal Biotechnology Have A Long Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at June 2020, G&E Herbal Biotechnology had cash of NT$122m and no debt. Looking at the last year, the company burnt through NT$12m. That means it had a cash runway of about 9.8 years as of June 2020. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
GTSM:4911 Debt to Equity History September 26th 2020

How Is G&E Herbal Biotechnology's Cash Burn Changing Over Time?

Whilst it's great to see that G&E Herbal Biotechnology has already begun generating revenue from operations, last year it only produced NT$19m, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. Notably, its cash burn was actually down by 63% in the last year, which is a real positive in terms of resilience, but uninspiring when it comes to investment for growth. G&E Herbal Biotechnology makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.

Can G&E Herbal Biotechnology Raise More Cash Easily?

There's no doubt G&E Herbal Biotechnology's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. 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.

G&E Herbal Biotechnology has a market capitalisation of NT$2.2b and burnt through NT$12m last year, which is 0.6% of the company's market value. 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 G&E Herbal Biotechnology's Cash Burn?

As you can probably tell by now, we're not too worried about G&E Herbal Biotechnology's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. But it's fair to say that its cash burn reduction was also very reassuring. 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. On another note, G&E Herbal Biotechnology has 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

Of course G&E Herbal Biotechnology 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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