There’s no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So, the natural question for Chanjet Information Technology (HKG:1588) shareholders is whether they should be concerned by its rate of cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
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Does Chanjet Information Technology 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. In June 2023, Chanjet Information Technology had CN¥1.2b in cash, and was debt-free. In the last year, its cash burn was CN¥163m. Therefore, from June 2023 it had 7.4 years of cash runway. Notably, however, the one analyst we see covering the stock thinks that Chanjet Information Technology will break even (at a free cash flow level) before then. If that happens, then the length of its cash runway, today, would become a moot point. The image below shows how its cash balance has been changing over the last few years.
How Well Is Chanjet Information Technology Growing?
At first glance it’s a bit worrying to see that Chanjet Information Technology actually boosted its cash burn by 32%, year on year. In light of that, the flat year on year operating leverage is a bit off-putting. In light of the data above, we’re fairly sanguine about the business growth trajectory. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Easily Can Chanjet Information Technology Raise Cash?
Even though it seems like Chanjet Information Technology is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.
Chanjet Information Technology has a market capitalisation of CN¥1.1b and burnt through CN¥163m last year, which is 15% of the company’s market value. Given that situation, it’s fair to say the company wouldn’t have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
So, Should We Worry About Chanjet Information Technology’s Cash Burn?
It may already be apparent to you that we’re relatively comfortable with the way Chanjet Information Technology is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. It’s clearly very positive to see that at least one analyst is forecasting the company will break even fairly soon. 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. We think it’s very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what Chanjet Information Technology’s CEO gets paid each year.
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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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.