Here's Why We're Not Too Worried About Lien Chang Electronic Enterprise's (TWSE:2431) Cash Burn Situation

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. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given this risk, we thought we'd take a look at whether Lien Chang Electronic Enterprise (TWSE:2431) shareholders should be worried about its cash burn. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Lien Chang Electronic Enterprise

Does Lien Chang Electronic Enterprise Have A Long Cash Runway?

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 March 2024, Lien Chang Electronic Enterprise had NT$934m in cash, and was debt-free. Importantly, its cash burn was NT$15m over the trailing twelve months. So it had a very long cash runway of many years from March 2024. 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 Lien Chang Electronic Enterprise Growing?

Lien Chang Electronic Enterprise managed to reduce its cash burn by 73% over the last twelve months, which suggests it's on the right flight path. But it was a bit disconcerting to see operating revenue down 41% in that time. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. In reality, this article only makes a short study of the company's growth data. You can take a look at how Lien Chang Electronic Enterprise has developed its business over time by checking this visualization of its revenue and earnings history.

Can Lien Chang Electronic Enterprise Raise More Cash Easily?

There's no doubt Lien Chang Electronic Enterprise seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. 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. 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.

Lien Chang Electronic Enterprise's cash burn of NT$15m is about 1.2% of its NT$1.3b market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

How Risky Is Lien Chang Electronic Enterprise's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Lien Chang Electronic Enterprise 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. Although we do find its falling revenue to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. 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, we conducted an in-depth investigation of the company, and identified 2 warning signs for Lien Chang Electronic Enterprise (1 is concerning!) that you should be aware of before investing here.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies with significant insider holdings, 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. 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.