Here's Why We're Not Too Worried About Sheen Tai Holdings Group's (HKG:1335) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. Indeed, Sheen Tai Holdings Group (HKG:1335) stock is up 122% in the last year, providing strong gains for shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given its strong share price performance, we think it's worthwhile for Sheen Tai Holdings Group shareholders to consider whether its cash burn is concerning. 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. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Sheen Tai Holdings Group

How Long Is Sheen Tai Holdings Group's Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at June 2024, Sheen Tai Holdings Group had cash of HK$211m and no debt. Importantly, its cash burn was HK$8.1m over the trailing twelve months. That means it had a cash runway of very many years as of June 2024. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. The image below shows how its cash balance has been changing over the last few years.

Is Sheen Tai Holdings Group's Revenue Growing?

Given that Sheen Tai Holdings Group actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 26%. In reality, this article only makes a short study of the company's growth data. You can take a look at how Sheen Tai Holdings Group has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For Sheen Tai Holdings Group To Raise More Cash For Growth?

Since its revenue growth is moving in the wrong direction, Sheen Tai Holdings Group shareholders may wish to think ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

Sheen Tai Holdings Group has a market capitalisation of HK$341m and burnt through HK$8.1m last year, which is 2.4% 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 Sheen Tai Holdings Group's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Sheen Tai Holdings Group's cash burn. For example, we think its cash runway suggests that the company is on a good path. While its falling revenue wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. 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. Taking a deeper dive, we've spotted 2 warning signs for Sheen Tai Holdings Group you should be aware of, and 1 of them doesn't sit too well with us.

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)

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.