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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Ping An Healthcare and Technology (HKG:1833) shareholders 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. We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Does Ping An Healthcare and Technology Have A Long 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. As at December 2020, Ping An Healthcare and Technology had cash of CN¥14b and no debt. Importantly, its cash burn was CN¥1.2b over the trailing twelve months. That means it had a cash runway of very many years as of December 2020. Importantly, though, analysts think that Ping An Healthcare and Technology will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. You can see how its cash balance has changed over time in the image below.
How Well Is Ping An Healthcare and Technology Growing?
Ping An Healthcare and Technology actually ramped up its cash burn by a whopping 85% in the last year, which shows it is boosting investment in the business. But the silver lining is that operating revenue increased by 36% in that time. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
Can Ping An Healthcare and Technology Raise More Cash Easily?
While Ping An Healthcare and Technology seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and 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).
Ping An Healthcare and Technology has a market capitalisation of CN¥100b and burnt through CN¥1.2b last year, which is 1.2% of the company’s market value. So it could almost certainly just borrow a little to fund another year’s growth, or else easily raise the cash by issuing a few shares.
How Risky Is Ping An Healthcare and Technology’s Cash Burn Situation?
As you can probably tell by now, we’re not too worried about Ping An Healthcare and Technology’s cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. 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. An in-depth examination of risks revealed 3 warning signs for Ping An Healthcare and Technology that readers should think about before committing capital to this stock.
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