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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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So, the natural question for China Kingstone Mining Holdings (HKG:1380) 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Check out our latest analysis for China Kingstone Mining Holdings
How Long Is China Kingstone Mining Holdings's Cash Runway?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. In June 2019, China Kingstone Mining Holdings had CN¥58m in cash, and was debt-free. In the last year, its cash burn was CN¥90m. So it had a cash runway of approximately 8 months from June 2019. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. You can see how its cash balance has changed over time in the image below.
How Well Is China Kingstone Mining Holdings Growing?
We reckon the fact that China Kingstone Mining Holdings managed to shrink its cash burn by 30% over the last year is rather encouraging. On top of that, operating revenue was up 39%, making for a heartening combination It seems to be growing nicely. In reality, this article only makes a short study of the company's growth data. You can take a look at how China Kingstone Mining Holdings is growing revenue over time by checking this visualization of past revenue growth.
How Easily Can China Kingstone Mining Holdings Raise Cash?
While China Kingstone Mining Holdings seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to 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.