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 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
Given this risk, we thought we'd take a look at whether Shenyang Public Utility Holdings (HKG:747) 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 Shenyang Public Utility 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 June 2019, Shenyang Public Utility Holdings had cash of CN¥3.3m and no debt. In the last year, its cash burn was CN¥235m. Therefore, from June 2019 it seems to us it had less than two months of cash runway. To be frank we are alarmed by how short that cash runway is! You can see how its cash balance has changed over time in the image below.
Is Shenyang Public Utility Holdings's Revenue Growing?
Given that Shenyang Public Utility Holdings actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. Sadly, operating revenue actually dropped like a stone in the last twelve months, falling 91%, which is rather concerning. In reality, this article only makes a short study of the company's growth data. You can take a look at how Shenyang Public Utility Holdings has developed its business over time by checking this visualization of its revenue and earnings history.
How Hard Would It Be For Shenyang Public Utility Holdings To Raise More Cash For Growth?
Since its revenue growth is moving in the wrong direction, Shenyang Public Utility Holdings shareholders may wish to think ahead to when the company may need to raise more cash. 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. 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.
Shenyang Public Utility Holdings has a market capitalisation of CN¥279m and burnt through CN¥235m last year, which is 84% of the company's market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.
So, Should We Worry About Shenyang Public Utility Holdings's Cash Burn?
There are no prizes for guessing that we think Shenyang Public Utility Holdings's cash burn is a bit of a worry. Take, for example, its cash runway, which suggests the company may have difficulty funding itself, in the future. While not as bad as its cash runway, its falling revenue is also a concern, and considering everything mentioned above, we're struggling to find much to be optimistic about. Its cash burn situation feels about as comfortable as sitting next to the lavatory on a long haul flight. The need for more cash seems just around the corner, and any dilution is likely to be rather severe. 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 Shenyang Public Utility Holdings 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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