Investors have seen success in owning shares of unprofitable businesses, such as Salesforce.com, which experienced losses before achieving growth. However, it is important to acknowledge the numerous unprofitable companies that deplete their cash and ultimately fail.
Concerns arise regarding Phoenix New Media's cash burn, which refers to its annual negative free cash flow. To assess the company's financial stability, we must compare its cash burn to its cash reserves, resulting in its 'cash runway'.
Phoenix New Media had CN¥1.1b in cash and no debt as of March 2023, with a cash burn of CN¥346m in the past year. Therefore, its cash runway was approximately 3.2 years from March 2023, providing a sense of reassurance. The image below illustrates the changes in its cash balance over time.
Despite the long cash runway, Phoenix New Media significantly increased its cash burn by 68% in the last year, indicating a substantial investment in the business. Additionally, operating revenue dropped by 23%, raising concerns about the company's growth metrics. It is essential to thoroughly examine Phoenix New Media's business development over time.
While Phoenix New Media appears to be in a relatively favorable position, it is worth considering its ability to raise additional cash to fuel further growth. Typically, companies issue shares or take on debt to secure new funds. By comparing the annual cash burn to the total market capitalization, we can estimate the number of shares the company would need to issue to sustain operations for another year at the same burn rate.
Phoenix New Media has a market capitalization of CN¥185m and burned through CN¥346m last year, equivalent to 187% of its market value. With such high expenditure relative to its market value, there is an elevated risk of funding distress, making investors wary of holding the stock.
Considering Phoenix New Media's cash burn, its cash runway provides reassurance, but the cash burn in relation to its market cap is cause for concern. Overall, the company's cash burn poses a risk based on the factors discussed in this article. Furthermore, there are additional aspects of Phoenix New Media that readers should be aware of.
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For a comprehensive analysis of Phoenix New Media, including fair value estimates, risks and warnings, dividends, insider transactions, and financial health, visit our Free Analysis page. We strive to provide unbiased analysis based on historical data and analyst forecasts, with a focus on long-term perspectives and fundamental data. Please note that our analysis may not incorporate the latest price-sensitive company announcements or qualitative material. Simply Wall St does not hold any positions in the mentioned stocks.
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