We can readily understand why investors are attracted to unprofitable companies. Indeed, HKE Holdings (HKG:1726) stock is up 467% in the last year, providing strong gains for shareholders. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So notwithstanding the buoyant share price, we think it's well worth asking whether HKE Holdings' cash burn is too risky. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for HKE Holdings

How Long Is HKE Holdings' 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. As at December 2022, HKE Holdings had cash of S$11m and no debt. Importantly, its cash burn was S$14m over the trailing twelve months. So it had a cash runway of approximately 10 months from December 2022. 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.

How Well Is HKE Holdings Growing?

One thing for shareholders to keep front in mind is that HKE Holdings increased its cash burn by 258% in the last twelve months. While operating revenue was up over the same period, the 8.4% gain gives us scant comfort. Considering these two factors together makes us nervous about the direction the company seems to be heading. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how HKE Holdings is building its business over time.

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

Since HKE Holdings has been boosting its cash burn, the market will likely be considering how it can raise more cash if need be. Companies can raise capital through either debt or equity. 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.

Since it has a market capitalisation of S$464m, HKE Holdings' S$14m in cash burn equates to about 3.0% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

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

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought HKE Holdings' cash burn relative to its market cap was relatively promising. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. Separately, we looked at different risks affecting the company and spotted 3 warning signs for HKE Holdings (of which 2 don't sit too well with us!) you should know about.

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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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.