We Think Kuangli Photoelectric Technology (TPE:6431) Can Easily Afford To Drive Business Growth

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Kuangli Photoelectric Technology (TPE:6431) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Kuangli Photoelectric Technology

Does Kuangli Photoelectric Technology Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2020, Kuangli Photoelectric Technology had NT$111m in cash, and was debt-free. Looking at the last year, the company burnt through NT$34m. That means it had a cash runway of about 3.2 years as of September 2020. A runway of this length affords the company the time and space it needs to develop the business. You can see how its cash balance has changed over time in the image below.

How Well Is Kuangli Photoelectric Technology Growing?

We reckon the fact that Kuangli Photoelectric Technology managed to shrink its cash burn by 47% over the last year is rather encouraging. And considering that its operating revenue gained 46% during that period, that's great to see. It seems to be growing nicely. In reality, this article only makes a short study of the company's growth data. You can take a look at how Kuangli Photoelectric Technology is growing revenue over time by checking this visualization of past revenue growth.

How Hard Would It Be For Kuangli Photoelectric Technology To Raise More Cash For Growth?

While Kuangli Photoelectric Technology 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. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Since it has a market capitalisation of NT$1.4b, Kuangli Photoelectric Technology's NT$34m in cash burn equates to about 2.5% of its 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 Kuangli Photoelectric Technology's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Kuangli Photoelectric Technology 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. But it's fair to say that its cash burn reduction was also very reassuring. 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. An in-depth examination of risks revealed 1 warning sign for Kuangli Photoelectric Technology that readers should think about before committing capital to this stock.

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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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