We're Keeping An Eye On Phoenix New Media's (NYSE:FENG) Cash Burn Rate

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. 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.

So should Phoenix New Media (NYSE:FENG) shareholders be worried about its cash burn? In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for Phoenix New Media

How Long Is Phoenix New Media's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at March 2023, Phoenix New Media had cash of CN¥1.1b and no debt. In the last year, its cash burn was CN¥346m. So it had a cash runway of about 3.2 years from March 2023. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.

How Well Is Phoenix New Media Growing?

Phoenix New Media actually ramped up its cash burn by a whopping 68% in the last year, which shows it is boosting investment in the business. As if that's not bad enough, the operating revenue also dropped by 23%, making us very wary indeed. Taken together, we think these growth metrics are a little worrying. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Phoenix New Media has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For Phoenix New Media To Raise More Cash For Growth?

While Phoenix New Media seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Phoenix New Media has a market capitalisation of CN¥185m and burnt through CN¥346m last year, which is 187% of the company's market value. Given just how high that expenditure is, relative to the company's market value, we think there's an elevated risk of funding distress, and we would be very nervous about holding the stock.

Is Phoenix New Media's Cash Burn A Worry?

On this analysis of Phoenix New Media's cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. Summing up, we think the Phoenix New Media's cash burn is a risk, based on the factors we mentioned in this article. On another note, Phoenix New Media has 3 warning signs (and 1 which can't be ignored) we think you should know about.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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.