We can readily understand why investors are attracted to unprofitable companies. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So should Shanxi Zhendong PharmaceuticalLtd (SZSE:300158) shareholders be worried about its cash burn? 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Does Shanxi Zhendong PharmaceuticalLtd Have A Long Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. Shanxi Zhendong PharmaceuticalLtd has such a small amount of debt that we'll set it aside, and focus on the CN¥2.1b in cash it held at March 2024. Looking at the last year, the company burnt through CN¥236m. That means it had a cash runway of about 8.7 years as of March 2024. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.
How Well Is Shanxi Zhendong PharmaceuticalLtd Growing?
We reckon the fact that Shanxi Zhendong PharmaceuticalLtd managed to shrink its cash burn by 33% over the last year is rather encouraging. But the revenue dip of 7.8% in the same period was a bit concerning. 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 Shanxi Zhendong PharmaceuticalLtd has developed its business over time by checking this visualization of its revenue and earnings history.
How Hard Would It Be For Shanxi Zhendong PharmaceuticalLtd To Raise More Cash For Growth?
There's no doubt Shanxi Zhendong PharmaceuticalLtd 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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.
Shanxi Zhendong PharmaceuticalLtd's cash burn of CN¥236m is about 5.1% of its CN¥4.6b market capitalisation. 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.
How Risky Is Shanxi Zhendong PharmaceuticalLtd's Cash Burn Situation?
It may already be apparent to you that we're relatively comfortable with the way Shanxi Zhendong PharmaceuticalLtd is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While its falling revenue wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Shanxi Zhendong PharmaceuticalLtd CEO is paid..
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.
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.