Is Fortune Sun (China) Holdings (HKG:352) In A Good Position To Invest In Growth?
Just because a business does not make any money, does not mean that the stock will go down. 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, the natural question for Fortune Sun (China) Holdings (HKG:352) shareholders is whether they should be concerned by its rate of 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.
View our latest analysis for Fortune Sun (China) Holdings
When Might Fortune Sun (China) Holdings Run Out Of Money?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at December 2019, Fortune Sun (China) Holdings had cash of CN¥28m and no debt. Importantly, its cash burn was CN¥22m over the trailing twelve months. So it had a cash runway of approximately 15 months from December 2019. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. The image below shows how its cash balance has been changing over the last few years.
Is Fortune Sun (China) Holdings's Revenue Growing?
We're hesitant to extrapolate on the recent trend to assess its cash burn, because Fortune Sun (China) Holdings actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 45%. In reality, this article only makes a short study of the company's growth data. You can take a look at how Fortune Sun (China) Holdings has developed its business over time by checking this visualization of its revenue and earnings history.
How Easily Can Fortune Sun (China) Holdings Raise Cash?
Since its revenue growth is moving in the wrong direction, Fortune Sun (China) Holdings shareholders may wish to think ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash to drive 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).
Fortune Sun (China) Holdings has a market capitalisation of CN¥63m and burnt through CN¥22m last year, which is 36% of the company's market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
Is Fortune Sun (China) Holdings's Cash Burn A Worry?
On this analysis of Fortune Sun (China) Holdings's cash burn, we think its cash runway was reassuring, while its falling revenue has us a bit worried. Summing up, we think the Fortune Sun (China) Holdings's cash burn is a risk, based on the factors we mentioned in this article. Separately, we looked at different risks affecting the company and spotted 5 warning signs for Fortune Sun (China) Holdings (of which 2 are concerning!) you should know about.
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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