We can readily understand why investors are attracted to unprofitable companies. Indeed, Cambricon Technologies (SHSE:688256) stock is up 360% in the last year, providing strong gains for shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So notwithstanding the buoyant share price, we think it's well worth asking whether Cambricon Technologies' cash burn is too risky. 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

How Long Is Cambricon Technologies' 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 September 2024, Cambricon Technologies had cash of CN¥2.6b and no debt. Importantly, its cash burn was CN¥2.1b over the trailing twelve months. Therefore, from September 2024 it had roughly 15 months of cash runway. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.

How Well Is Cambricon Technologies Growing?

Notably, Cambricon Technologies actually ramped up its cash burn very hard and fast in the last year, by 166%, signifying heavy investment in the business. But the silver lining is that operating revenue increased by 24% in that time. Considering both these metrics, we're a little concerned about how the company is developing. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Hard Would It Be For Cambricon Technologies To Raise More Cash For Growth?

Given the trajectory of Cambricon Technologies' cash burn, many investors will already be thinking about how it might raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Cambricon Technologies has a market capitalisation of CN¥282b and burnt through CN¥2.1b last year, which is 0.8% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

So, Should We Worry About Cambricon Technologies' Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Cambricon Technologies' cash burn relative to its market cap was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Cambricon Technologies' situation. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 1 warning sign for Cambricon Technologies that potential shareholders should take into account before putting money into a stock.

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.