We're Not Very Worried About Lai Group Holding's (HKG:8455) Cash Burn Rate

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Lai Group Holding (HKG:8455) shareholders be worried about its 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'.

See our latest analysis for Lai Group Holding

How Long Is Lai Group Holding's Cash Runway?

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 Lai Group Holding last reported its balance sheet in September 2019, it had zero debt and cash worth HK$48m. In the last year, its cash burn was HK$2.8m. That means it had a cash runway of very many years as of September 2019. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.

How Well Is Lai Group Holding Growing?

Some investors might find it troubling that Lai Group Holding is actually increasing its cash burn, which is up 37% in the last year. And we must say we find it concerning that operating revenue dropped 7.9% over the same period. Taken together, we think these growth metrics are a little worrying. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Lai Group Holding has developed its business over time by checking this visualization of its revenue and earnings history.

Can Lai Group Holding Raise More Cash Easily?

While Lai Group Holding 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. 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).

Lai Group Holding has a market capitalisation of HK$40m and burnt through HK$2.8m 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.

So, Should We Worry About Lai Group Holding's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Lai Group Holding is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, Lai Group Holding has 3 warning signs (and 2 which are concerning) we think you should know about.

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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