We can readily understand why investors are attracted to unprofitable companies. 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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should Global Link Communications Holdings (HKG:8060) 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
How Long Is Global Link Communications Holdings's Cash Runway?
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 March 2019, Global Link Communications Holdings had cash of HK$81m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was HK$17m. That means it had a cash runway of about 4.8 years as of March 2019. There's no doubt that this is a reassuringly long runway. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Global Link Communications Holdings Growing?
Some investors might find it troubling that Global Link Communications Holdings is actually increasing its cash burn, which is up 14% in the last year. Also concerning, operating revenue was actually down by 22% in that time. Taken together, we think these growth metrics are a little worrying. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Global Link Communications Holdings is building its business over time.
How Hard Would It Be For Global Link Communications Holdings To Raise More Cash For Growth?
Global Link Communications Holdings seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Global Link Communications Holdings has a market capitalisation of HK$100m and burnt through HK$17m last year, which is 17% 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 Global Link Communications Holdings's Cash Burn Situation?
On this analysis of Global Link Communications Holdings's cash burn, we think its cash runway was reassuring, while its falling revenue has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Global Link Communications Holdings's situation. 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 Global Link Communications Holdings CEO is paid..
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