Just because a business does not make any money, does not mean that the stock will go down. 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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given this risk, we thought we'd take a look at whether Hangzhou SDIC Microelectronics (SHSE:688130) shareholders should be worried about its 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). Let's start with an examination of the business' cash, relative to its cash burn.

Does Hangzhou SDIC Microelectronics 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. In September 2024, Hangzhou SDIC Microelectronics had CN¥959m in cash, and was debt-free. Importantly, its cash burn was CN¥22m over the trailing twelve months. That means it had a cash runway of very many years as of September 2024. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. You can see how its cash balance has changed over time in the image below.

Is Hangzhou SDIC Microelectronics' Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Hangzhou SDIC Microelectronics actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Although it's hardly brilliant growth, it's good to see the company grew revenue by 10% 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 Hangzhou SDIC Microelectronics has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For Hangzhou SDIC Microelectronics To Raise More Cash For Growth?

While Hangzhou SDIC Microelectronics is showing solid revenue growth, it's still worth considering how easily it could raise more cash, even just to fuel faster 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 and fund growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Hangzhou SDIC Microelectronics' cash burn of CN¥22m is about 0.7% of its CN¥3.0b market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

Is Hangzhou SDIC Microelectronics' Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Hangzhou SDIC Microelectronics' cash burn. For example, we think its cash runway suggests that the company is on a good path. Its weak point is its revenue growth, but even that wasn't too bad! Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. An in-depth examination of risks revealed 2 warning signs for Hangzhou SDIC Microelectronics that readers should think about before committing capital to this stock.

Of course Hangzhou SDIC Microelectronics 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 with high insider ownership.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.