We can readily understand why investors are attracted to unprofitable companies. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we'd take a look at whether Kingbo Strike (HKG:1421) 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'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
When Might Kingbo Strike 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, Kingbo Strike had cash of S$21m and no debt. Importantly, its cash burn was S$4.5m over the trailing twelve months. Therefore, from June 2019 it had 4.7 years of cash runway. There's no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.
How Well Is Kingbo Strike Growing?
Happily, Kingbo Strike is travelling in the right direction when it comes to its cash burn, which is down 74% over the last year. And while hardly exciting, it was still good to see revenue growth of 20% during that time. It seems to be growing nicely. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Kingbo Strike is building its business over time.
How Hard Would It Be For Kingbo Strike To Raise More Cash For Growth?
There's no doubt Kingbo Strike seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. 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. 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.
Kingbo Strike has a market capitalisation of HK$242m and burnt through S$4.5m 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.
So, Should We Worry About Kingbo Strike's Cash Burn?
It may already be apparent to you that we're relatively comfortable with the way Kingbo Strike is burning through its cash. 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! Looking at all the measures in this article, together, we're not worried about its rate of cash burn, which seems to be under control. Notably, our data indicates that Kingbo Strike insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
Of course Kingbo Strike may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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.
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