Companies Like Chung Fu Tex-International (TPE:1435) Are In A Position To Invest In Growth

Just because a business does not make any money, does not mean that the stock will go down. By way of example, Chung Fu Tex-International (TPE:1435) has seen its share price rise 235% over the last year, delighting many shareholders. 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 Chung Fu Tex-International's cash burn is. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Chung Fu Tex-International

How Long Is Chung Fu Tex-International's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Chung Fu Tex-International last reported its balance sheet in December 2020, it had zero debt and cash worth NT$374m. Looking at the last year, the company burnt through NT$11m. So it had a very long cash runway of many years from December 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. Depicted below, you can see how its cash holdings have changed over time.

How Is Chung Fu Tex-International's Cash Burn Changing Over Time?

In our view, Chung Fu Tex-International doesn't yet produce significant amounts of operating revenue, since it reported just NT$15m in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. The skyrocketing cash burn up 181% year on year certainly tests our nerves. That sort of ramp in expenditure is no doubt intended to generate worthwhile long term returns. Chung Fu Tex-International 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 Chung Fu Tex-International Raise More Cash Easily?

While Chung Fu Tex-International does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Since it has a market capitalisation of NT$3.0b, Chung Fu Tex-International's NT$11m in cash burn equates to about 0.4% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

So, Should We Worry About Chung Fu Tex-International's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Chung Fu Tex-International is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. On another note, Chung Fu Tex-International has 2 warning signs (and 1 which is significant) we think you should know about.

Of course Chung Fu Tex-International 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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