There’s no doubt that money can be made by owning shares of unprofitable businesses. 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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for C&G Environmental Protection Holdings (SGX:D79) 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.
Does C&G Environmental Protection Holdings Have A Long Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. In June 2019, C&G Environmental Protection Holdings had HK$18k in cash, and was debt-free. In the last year, its cash burn was HK$1.1m. That means it had a cash runway of under two months as of June 2019. To be frank we are alarmed by how short that cash runway is! The image below shows how its cash balance has been changing over the last few years.
How Is C&G Environmental Protection Holdings’s Cash Burn Changing Over Time?
C&G Environmental Protection Holdings didn’t record any revenue over the last year, indicating that it’s an early stage company still developing its business. So while we can’t look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. The good news, from a balance sheet perspective, is that it actually reduced its cash burn by 100% in the last twelve months. While that hardly points to growth potential, it does at least suggest the company is trying to survive. C&G Environmental Protection Holdings makes us a little nervous due to its lack of substantial operating revenue. So we’d generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Easily Can C&G Environmental Protection Holdings Raise Cash?
There’s no doubt C&G Environmental Protection Holdings’s rapidly reducing cash burn brings comfort, but even if it’s only hypothetical, it’s always worth asking how easily it could raise more money to fund further 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 to drive 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).
C&G Environmental Protection Holdings’s cash burn of HK$1.1m is about 10.0% of its S$2.0m 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.
How Risky Is C&G Environmental Protection Holdings’s Cash Burn Situation?
On this analysis of C&G Environmental Protection Holdings’s cash burn, we think its cash burn reduction was reassuring, while its cash runway has us a bit worried. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. For us, it’s always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the C&G Environmental Protection Holdings CEO receives in total remuneration.
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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.