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Here's Why We're A Bit Worried About Prosper One International Holdings's (HKG:1470) Cash Burn Situation

Simply Wall St

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 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 Prosper One International Holdings (HKG:1470) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for Prosper One International Holdings

How Long Is Prosper One International 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. Prosper One International Holdings has such a small amount of debt that we'll set it aside, and focus on the HK$20m in cash it held at October 2019. Importantly, its cash burn was HK$31m over the trailing twelve months. Therefore, from October 2019 it had roughly 8 months of cash runway. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Importantly, if we extrapolate recent cash burn trends, the cash runway would be noticeably longer. The image below shows how its cash balance has been changing over the last few years.

SEHK:1470 Historical Debt, December 31st 2019

How Well Is Prosper One International Holdings Growing?

It was quite stunning to see that Prosper One International Holdings increased its cash burn by 2700% over the last year. That's pretty alarming given that operating revenue dropped 54% over the last year, though the business is likely attempting a strategic pivot. Considering these two factors together makes us nervous about the direction the company seems to be heading. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Prosper One International Holdings is building its business over time.

How Hard Would It Be For Prosper One International Holdings To Raise More Cash For Growth?

Given its revenue and free cash flow are both moving in the wrong direction, shareholders may well be wondering how easily Prosper One International Holdings could raise 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 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.

Prosper One International Holdings's cash burn of HK$31m is about 18% of its HK$168m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

Is Prosper One International Holdings's Cash Burn A Worry?

On this analysis of Prosper One International Holdings's cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. 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 Prosper One International Holdings CEO receives in total remuneration.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.