We Think Royal Century Resources Holdings (HKG:8125) Can Afford To Drive Business Growth

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Royal Century Resources Holdings (HKG:8125) 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Royal Century Resources Holdings

Does Royal Century Resources Holdings Have A Long 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 Royal Century Resources Holdings last reported its balance sheet in September 2019, it had zero debt and cash worth HK$24m. In the last year, its cash burn was HK$4.3m. So it had a cash runway of about 5.6 years from September 2019. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.

How Well Is Royal Century Resources Holdings Growing?

Royal Century Resources Holdings managed to reduce its cash burn by 62% over the last twelve months, which suggests it's on the right flight path. Unfortunately, however, operating revenue dropped 8.9% during the same time frame. On balance, we'd say the company is improving over time. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Royal Century Resources Holdings has developed its business over time by checking this visualization of its revenue and earnings history.

Can Royal Century Resources Holdings Raise More Cash Easily?

There's no doubt Royal Century Resources Holdings seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to 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.

Royal Century Resources Holdings's cash burn of HK$4.3m is about 12% of its HK$36m market capitalisation. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

So, Should We Worry About Royal Century Resources Holdings's Cash Burn?

As you can probably tell by now, we're not too worried about Royal Century Resources Holdings's cash burn. For example, we think its cash runway suggests that the company is on a good path. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Notably, our data indicates that Royal Century Resources Holdings insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.

Of course Royal Century Resources 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.