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. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
Given this risk, we thought we'd take a look at whether Lajin Entertainment Network Group (HKG:8172) shareholders should 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
View our latest analysis for Lajin Entertainment Network Group
Does Lajin Entertainment Network Group Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2023, Lajin Entertainment Network Group had cash of HK$27m and no debt. In the last year, its cash burn was HK$7.8m. That means it had a cash runway of about 3.4 years as of December 2023. 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 Lajin Entertainment Network Group Growing?
Lajin Entertainment Network Group managed to reduce its cash burn by 60% over the last twelve months, which suggests it's on the right flight path. And it is also great to see that the revenue is up a stonking 175% in the same time period. Considering these factors, we're fairly impressed by its growth trajectory. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Lajin Entertainment Network Group is growing revenue over time by checking this visualization of past revenue growth.
How Hard Would It Be For Lajin Entertainment Network Group To Raise More Cash For Growth?
There's no doubt Lajin Entertainment Network Group 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. 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.
Lajin Entertainment Network Group has a market capitalisation of HK$223m and burnt through HK$7.8m last year, which is 3.5% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
Is Lajin Entertainment Network Group's Cash Burn A Worry?
It may already be apparent to you that we're relatively comfortable with the way Lajin Entertainment Network Group is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. But it's fair to say that its cash burn reduction was also very reassuring. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Taking an in-depth view of risks, we've identified 3 warning signs for Lajin Entertainment Network Group that you should be aware of before investing.
Of course Lajin Entertainment Network Group 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 with high insider ownership.
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com