Holy Stone Healthcare (GTSM:4194) Is In A Strong Position To Grow Its Business

We can readily understand why investors are attracted to unprofitable companies. Indeed, Holy Stone Healthcare (GTSM:4194) stock is up 103% in the last year, providing strong gains for shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given its strong share price performance, we think it's worthwhile for Holy Stone Healthcare shareholders to consider whether its cash burn is concerning. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. 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 Holy Stone Healthcare

Does Holy Stone Healthcare 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. In June 2020, Holy Stone Healthcare had NT$419m in cash, and was debt-free. Looking at the last year, the company burnt through NT$120m. So it had a cash runway of about 3.5 years from June 2020. There's no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.

How Well Is Holy Stone Healthcare Growing?

We reckon the fact that Holy Stone Healthcare managed to shrink its cash burn by 39% over the last year is rather encouraging. And considering that its operating revenue gained 33% during that period, that's great to see. It seems to be growing nicely. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Holy Stone Healthcare is growing revenue over time by checking this visualization of past revenue growth.

How Hard Would It Be For Holy Stone Healthcare To Raise More Cash For Growth?

While Holy Stone Healthcare seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Holy Stone Healthcare's cash burn of NT$120m is about 5.0% of its NT$2.4b market capitalisation. 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.

How Risky Is Holy Stone Healthcare's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Holy Stone Healthcare is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. And even though its cash burn reduction wasn't quite as impressive, it was still a positive. 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 2 warning signs for Holy Stone Healthcare that potential shareholders should take into account before putting money into a stock.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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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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