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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
Given this risk, we thought we'd take a look at whether YuanShengTai Dairy Farm (HKG:1431) shareholders should be worried about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Let's start with an examination of the business's cash, relative to its cash burn.
When Might YuanShengTai Dairy Farm Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When YuanShengTai Dairy Farm last reported its balance sheet in June 2019, it had zero debt and cash worth CN¥1.1b. Looking at the last year, the company burnt through CN¥155m. So it had a cash runway of about 7.0 years from June 2019. 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 Well Is YuanShengTai Dairy Farm Growing?
It was fairly positive to see that YuanShengTai Dairy Farm reduced its cash burn by 42% during the last year. And operating revenue was up by 15%, too. We think it is growing rather well, upon reflection. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how YuanShengTai Dairy Farm is building its business over time.
How Hard Would It Be For YuanShengTai Dairy Farm To Raise More Cash For Growth?
While YuanShengTai Dairy Farm 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 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.
YuanShengTai Dairy Farm has a market capitalisation of HK$1.5b and burnt through CN¥155m last year, which is 11% of the company's market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
How Risky Is YuanShengTai Dairy Farm's Cash Burn Situation?
As you can probably tell by now, we're not too worried about YuanShengTai Dairy Farm's cash burn. For example, we think its cash runway suggests that the company is on a good path. Its revenue growth wasn't quite as good, but was still rather encouraging! After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the YuanShengTai Dairy Farm CEO is paid..
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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If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.