Just because a business does not make any money, does not mean that the stock will go down. 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.
So should Perfectech International Holdings (HKG:765) shareholders be worried about its cash burn? In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. 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 Perfectech International Holdings
When Might Perfectech International Holdings 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. In December 2023, Perfectech International Holdings had HK$46m in cash, and was debt-free. In the last year, its cash burn was HK$22m. So it had a cash runway of about 2.1 years from December 2023. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.
Is Perfectech International Holdings' Revenue Growing?
We're hesitant to extrapolate on the recent trend to assess its cash burn, because Perfectech International Holdings actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 12%. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Perfectech International Holdings is building its business over time.
How Easily Can Perfectech International Holdings Raise Cash?
Given its problematic fall in revenue, Perfectech International Holdings shareholders should consider how the company could fund its growth, if it turns out it needs more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.
Perfectech International Holdings has a market capitalisation of HK$219m and burnt through HK$22m last year, which is 10% of the company's market value. 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.
So, Should We Worry About Perfectech International Holdings' Cash Burn?
On this analysis of Perfectech International Holdings' cash burn, we think its cash runway was reassuring, while its falling revenue has us a bit worried. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 1 warning sign for Perfectech International Holdings that investors should know when investing in the stock.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.