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We're Interested To See How Wah Fu Education Group (NASDAQ:WAFU) Uses Its Cash Hoard To Grow

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·4 min read
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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. Indeed, Wah Fu Education Group (NASDAQ:WAFU) stock is up 578% in the last year, providing strong gains for shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given its strong share price performance, we think it's worthwhile for Wah Fu Education Group shareholders to consider whether its cash burn is concerning. 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.

Check out our latest analysis for Wah Fu Education Group

Does Wah Fu Education Group Have A Long 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. When Wah Fu Education Group last reported its balance sheet in September 2020, it had zero debt and cash worth US$9.3m. Importantly, its cash burn was US$278k over the trailing twelve months. That means it had a cash runway of very many years as of September 2020. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
debt-equity-history-analysis

Is Wah Fu Education Group's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Wah Fu Education Group actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. It's nice to see that operating revenue was up 50% in the last year. In reality, this article only makes a short study of the company's growth data. You can take a look at how Wah Fu Education Group is growing revenue over time by checking this visualization of past revenue growth.

How Easily Can Wah Fu Education Group Raise Cash?

Notwithstanding Wah Fu Education Group'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. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Since it has a market capitalisation of US$55m, Wah Fu Education Group's US$278k in cash burn equates to about 0.5% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

Is Wah Fu Education Group's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Wah Fu Education Group's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. And even its cash burn relative to its market cap was very encouraging. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Wah Fu Education Group (of which 1 makes us a bit uncomfortable!) you should know about.

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)

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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.