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We can readily understand why investors are attracted to unprofitable companies. 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 the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
Given this risk, we thought we'd take a look at whether Lajin Entertainment Network Group (HKG:8172) shareholders should be worried about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
View our latest analysis for Lajin Entertainment Network Group
When Might Lajin Entertainment Network Group Run Out Of Money?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In June 2019, Lajin Entertainment Network Group had HK$156m in cash, and was debt-free. Importantly, its cash burn was HK$62m over the trailing twelve months. So it had a cash runway of about 2.5 years from June 2019. That's decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.
How Well Is Lajin Entertainment Network Group Growing?
Happily, Lajin Entertainment Network Group is travelling in the right direction when it comes to its cash burn, which is down 56% over the last year. But it was a bit disconcerting to see operating revenue down 38% in that time. On balance, we'd say the company is improving over time. In reality, this article only makes a short study of the company's growth data. You can take a look at how Lajin Entertainment Network Group has developed its business over time by checking this visualization of its revenue and earnings history.
Can Lajin Entertainment Network Group Raise More Cash Easily?
Lajin Entertainment Network Group seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. 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).