Even if a business loses money, shareholders have the potential to make money if they buy a good business at the right price. For example, while Amazon lost money for many years after going public, if you started buying and holding these stocks in 1999, you would have made a fortune. But while history praises these rare successes, those that fail are often forgotten. Who remembers Pets.com?
Given this risk, we thought we should see whether Yidu Technology (HKG:2158) Shareholders should worry about burning cash. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount a company uses each year to fund its growth. Let’s start by examining a business’ cash, relative to its cash burn.
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When will Yidu Tech run out of money?
You can calculate a company’s cash runway by dividing the amount of cash the company has by the rate at which cash is being spent. When Yidu Technology last reported its balance sheet in March 2022, it had zero debt and cash and was worth 3.8 yuan. Last year, its cash burn was RMB 683 million. That means it has a cash runway of about 5.5 years as of March 2022. Importantly, though, analysts believe Yidu will reach cash flow breakeven before then. If that happens, the length of its cash runway will be a matter of debate today. As you can see in the chart below, you can see how its cash holdings have changed over time.
How is Yidu Technology developing?
Yidu Technology increased its investment significantly last year, and its cash burn increased by 95%. But thankfully, operating income was up 43% at the time. Taking the aforementioned factors into consideration, the company isn’t bad at evaluating its performance over time. While the past is always worth studying, the most important is the future. For this reason, it makes sense to look at our analysts’ forecasts for the company.
How easy is Yidu Technology to finance?
There’s no question that Yidu seems to be in a pretty good position to manage its cash burn, but even if that’s just hypothetical, it’s always worth asking how it can easily raise more money to fund growth. Generally, public companies can raise new cash by issuing stock or taking on debt. One of the main advantages of public company holdings is the ability to sell shares to investors to raise cash and fund growth. By comparing a company’s annual cash burn to its total market capitalization, we can roughly estimate how many shares it must issue to keep the company afloat for another year (at the same burn rate).
Yidu Technology, with a market value of 510 million yuan, burned 683 million yuan last year, accounting for 13% of the company’s market value. Therefore, we take a risk that the company can raise more cash for growth without too much trouble, albeit at the cost of dilution.
So, should we be worried about Yidu Technology’s burning of money?
As you may already know, we are quite satisfied with the way Yidu Technology burns money. For example, we think its cash runway shows that the company is on a good path. While we must admit that its increasing cash burn is a bit concerning, the other factors mentioned in this article offer great comfort in terms of cash burn. There is no doubt that analysts predict it will break even in the near future, much to the reassurance of shareholders. Considering all the factors in this report, we’re not at all concerned about its cash burn, as the business appears to be well-capitalized to spend as needed. While it’s important to consider hard data like the metrics above, many investors will also be interested to note that Yidu Tech insiders have been trading the company’s stock. Click here to find out if they’ve been buying or selling.
If you want to check out another company with better fundamentals, don’t miss it free An interesting list of companies that have high ROE and low debt or this list of stocks all predict growth.
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This article by Simply Wall St is general in nature. We provide commentary based solely on historical data and analyst forecasts using an unbiased methodology and our articles are not intended to provide financial advice. It does not constitute advice to buy or sell any stock and does not take into account your objectives or your financial situation. Our goal is to bring you long-term focused analytics driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Wall Street has no positions in any of the stocks mentioned.
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