Will China Tian Yuan Healthcare Group (HKG:557) Spend Its Cash Wisely?
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. 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 China Tian Yuan Healthcare Group (HKG:557) shareholders 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
See our latest analysis for China Tian Yuan Healthcare Group
How Long Is China Tian Yuan Healthcare Group's Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When China Tian Yuan Healthcare Group last reported its balance sheet in June 2019, it had zero debt and cash worth HK$25m. Importantly, its cash burn was HK$89m over the trailing twelve months. So it had a cash runway of approximately 3 months from June 2019. That's a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. The image below shows how its cash balance has been changing over the last few years.
How Well Is China Tian Yuan Healthcare Group Growing?
Happily, China Tian Yuan Healthcare Group is travelling in the right direction when it comes to its cash burn, which is down 60% over the last year. Pleasingly, this was achieved with the help of a 21% boost to revenue. 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 China Tian Yuan Healthcare Group has developed its business over time by checking this visualization of its revenue and earnings history.
How Easily Can China Tian Yuan Healthcare Group Raise Cash?
Since China Tian Yuan Healthcare Group revenue has been falling, the market will likely be considering how it can raise more cash if need be. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash to 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.
China Tian Yuan Healthcare Group has a market capitalisation of HK$247m and burnt through HK$89m last year, which is 36% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.
How Risky Is China Tian Yuan Healthcare Group's Cash Burn Situation?
On this analysis of China Tian Yuan Healthcare Group's cash burn, we think its cash burn reduction was reassuring, while its cash runway has us a bit worried. Summing up, we think the China Tian Yuan Healthcare Group's cash burn is a risk, based on the factors we mentioned in this article. For us, it's always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the China Tian Yuan Healthcare Group CEO receives in total remuneration.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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