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 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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should Wan Leader International (HKG:8482) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
How Long Is Wan Leader International's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2019, Wan Leader International had HK$27m in cash, and was debt-free. In the last year, its cash burn was HK$39m. That means it had a cash runway of around 8 months as of September 2019. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.
Is Wan Leader International's Revenue Growing?
We're hesitant to extrapolate on the recent trend to assess its cash burn, because Wan Leader International actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. In fact, operating revenue has stayed pretty steady over the last twelve months. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Wan Leader International is building its business over time.
Can Wan Leader International Raise More Cash Easily?
Notwithstanding Wan Leader International's revenue growth, it is still important to consider how it could raise more money, if it needs to. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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.
Wan Leader International has a market capitalisation of HK$176m and burnt through HK$39m last year, which is 22% 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.
How Risky Is Wan Leader International's Cash Burn Situation?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Wan Leader International's revenue growth was relatively promising. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. 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 Wan Leader International CEO is paid..
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