There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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 Integrated Waste Solutions Group Holdings (HKG:923) 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.
How Long Is Integrated Waste Solutions Group Holdings's Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Integrated Waste Solutions Group Holdings last reported its balance sheet in September 2019, it had zero debt and cash worth HK$150m. In the last year, its cash burn was HK$8.3m. So it had a very long cash runway of many years from September 2019. 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.
How Well Is Integrated Waste Solutions Group Holdings Growing?
Happily, Integrated Waste Solutions Group Holdings is travelling in the right direction when it comes to its cash burn, which is down 63% over the last year. However, operating revenue growth was flat over the period. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Integrated Waste Solutions Group Holdings is building its business over time.
How Hard Would It Be For Integrated Waste Solutions Group Holdings To Raise More Cash For Growth?
While Integrated Waste Solutions Group Holdings seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.
Integrated Waste Solutions Group Holdings's cash burn of HK$8.3m is about 3.0% of its HK$275m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
So, Should We Worry About Integrated Waste Solutions Group Holdings's Cash Burn?
It may already be apparent to you that we're relatively comfortable with the way Integrated Waste Solutions Group Holdings is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While its falling revenue wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. 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 Integrated Waste Solutions Group Holdings CEO is paid..
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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