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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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should WWPKG Holdings (HKG:8069) shareholders be worried about its 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.
Check out our latest analysis for WWPKG Holdings
When Might WWPKG Holdings 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. When WWPKG Holdings last reported its balance sheet in March 2019, it had zero debt and cash worth HK$55m. Importantly, its cash burn was HK$12m over the trailing twelve months. That means it had a cash runway of about 4.5 years as of March 2019. There's no doubt that this is a reassuringly long runway. Depicted below, you can see how its cash holdings have changed over time.
How Well Is WWPKG Holdings Growing?
Happily, WWPKG Holdings is travelling in the right direction when it comes to its cash burn, which is down 59% over the last year. Unfortunately, however, operating revenue dropped 20% during the same time frame. On balance, we'd say the company is improving over time. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how WWPKG Holdings is building its business over time.
How Hard Would It Be For WWPKG Holdings To Raise More Cash For Growth?
There's no doubt WWPKG 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. Companies can raise capital through either debt or equity. 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).
WWPKG Holdings has a market capitalisation of HK$174m and burnt through HK$12m last year, which is 7.1% of the company's 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.