Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for GBA Holdings (HKG:261) shareholders is whether they should be concerned by its rate of 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for GBA Holdings

How Long Is GBA Holdings' 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. When GBA Holdings last reported its balance sheet in December 2021, it had zero debt and cash worth HK$97m. In the last year, its cash burn was HK$136m. That means it had a cash runway of around 9 months as of December 2021. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. You can see how its cash balance has changed over time in the image below.

Is GBA Holdings' Revenue Growing?

Given that GBA Holdings 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. Although it's hardly brilliant growth, it's good to see the company grew revenue by 19% in the last year. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how GBA Holdings has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For GBA Holdings To Raise More Cash For Growth?

Notwithstanding GBA Holdings' revenue growth, it is still important to consider how it could raise more money, if it needs to. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Since it has a market capitalisation of HK$195m, GBA Holdings' HK$136m in cash burn equates to about 70% of its market value. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.

So, Should We Worry About GBA Holdings' Cash Burn?

On this analysis of GBA Holdings' cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap has us a bit worried. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. Taking a deeper dive, we've spotted 3 warning signs for GBA Holdings you should be aware of, and 2 of them don't sit too well with us.

Of course GBA Holdings may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.