We can readily understand why investors are attracted to unprofitable companies. Indeed, Ping An Healthcare and Technology (HKG:1833) stock is up 180% in the last year, providing strong gains for shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So notwithstanding the buoyant share price, we think it’s well worth asking whether Ping An Healthcare and Technology’s cash burn is too risky 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 Ping An Healthcare and Technology
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. In December 2019, Ping An Healthcare and Technology had CN¥7.4b in cash, and was debt-free. Importantly, its cash burn was CN¥637m over the trailing twelve months. So it had a very long cash runway of many years from December 2019. Notably, however, analysts think that Ping An Healthcare and Technology will break even (at a free cash flow level) before then. If that happens, then the length of its cash runway, today, would become a moot point. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Ping An Healthcare and Technology Growing?
We reckon the fact that Ping An Healthcare and Technology managed to shrink its cash burn by 50% over the last year is rather encouraging. Having said that, the revenue growth of 52% was considerably more inspiring. It seems to be growing nicely. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
Can Ping An Healthcare and Technology Raise More Cash Easily?
We are certainly impressed with the progress Ping An Healthcare and Technology has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. By looking at a company’s cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year’s cash burn.
Ping An Healthcare and Technology has a market capitalisation of CN¥106b and burnt through CN¥637m last year, which is 0.6% 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.
Is Ping An Healthcare and Technology’s Cash Burn A Worry?
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 revenue growth stands out as evidence that the company is well on top of its spending. And even its cash burn reduction was very encouraging. It’s clearly very positive to see that analysts are forecasting the company will break even fairly soon. After considering a range of factors in this article, we’re pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Its important for readers to be cognizant of the risks that can affect the company’s operations, and we’ve picked out 1 warning sign for Ping An Healthcare and Technology that investors should know when investing in the stock.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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