Yahoo Finanza We're Hopeful That Lianhua Supermarket Holdings (HKG:980) Will Use Its Cash Wisely
We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. 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, the natural question for Lianhua Supermarket Holdings (HKG:980) shareholders is whether they should be concerned by its rate of 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). Let's start with an examination of the business's cash, relative to its cash burn.
See our latest analysis for Lianhua Supermarket Holdings
Does Lianhua Supermarket Holdings 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. As at December 2019, Lianhua Supermarket Holdings had cash of CN¥4.0b and no debt. In the last year, its cash burn was CN¥97m. That means it had a cash runway of very many years as of December 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 Lianhua Supermarket Holdings Growing?
Happily, Lianhua Supermarket Holdings is travelling in the right direction when it comes to its cash burn, which is down 69% over the last year. Mundanely, though, operating revenue growth was flat. It seems to be growing nicely. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Lianhua Supermarket Holdings has developed its business over time by checking this visualization of its revenue and earnings history.
Can Lianhua Supermarket Holdings Raise More Cash Easily?
There's no doubt Lianhua Supermarket Holdings 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. Many companies end up issuing new shares to fund future growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Since it has a market capitalisation of CN¥1.3b, Lianhua Supermarket Holdings's CN¥97m in cash burn equates to about 7.2% of its 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.
So, Should We Worry About Lianhua Supermarket Holdings's Cash Burn?
As you can probably tell by now, we're not too worried about Lianhua Supermarket Holdings's cash burn. For example, we think its cash runway suggests that the company is on a good path. On this analysis its revenue growth was its weakest feature, but we are not concerned about it. 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. An in-depth examination of risks revealed 1 warning sign for Lianhua Supermarket Holdings that readers should think about before committing capital to this stock.
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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. Thank you for reading.
