We can readily understand why investors are attracted to unprofitable companies. Indeed, Novacon Technology Group (HKG:8635) stock is up 511% in the last year, providing strong gains for shareholders. 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.
So notwithstanding the buoyant share price, we think it's well worth asking whether Novacon Technology Group's cash burn is too risky. 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
See our latest analysis for Novacon Technology Group
Does Novacon Technology Group Have A Long 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 Novacon Technology Group last reported its September 2024 balance sheet in October 2024, it had zero debt and cash worth HK$39m. Looking at the last year, the company burnt through HK$16m. That means it had a cash runway of about 2.4 years as of September 2024. Arguably, that's a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Novacon Technology Group Growing?
At first glance it's a bit worrying to see that Novacon Technology Group actually boosted its cash burn by 24%, year on year. The fact that operating revenue was down 54% only gives us further disquiet. Considering both these metrics, we're a little concerned about how the company is developing. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Novacon Technology Group has developed its business over time by checking this visualization of its revenue and earnings history.
How Easily Can Novacon Technology Group Raise Cash?
Even though it seems like Novacon Technology Group is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Since it has a market capitalisation of HK$176m, Novacon Technology Group's HK$16m in cash burn equates to about 9.4% of its market value. 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 Novacon Technology Group's Cash Burn?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Novacon Technology Group's cash runway was relatively promising. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Taking a deeper dive, we've spotted 4 warning signs for Novacon Technology Group you should be aware of, and 2 of them are potentially serious.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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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.