There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Zhongfu Straits (Pingtan) Development (SZSE:000592) shareholders 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

How Long Is Zhongfu Straits (Pingtan) Development's 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. As at March 2024, Zhongfu Straits (Pingtan) Development had cash of CN¥744m and no debt. Looking at the last year, the company burnt through CN¥92m. Therefore, from March 2024 it had 8.1 years of cash runway. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. Depicted below, you can see how its cash holdings have changed over time.

Is Zhongfu Straits (Pingtan) Development's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Zhongfu Straits (Pingtan) Development actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. It's nice to see that operating revenue was up 37% in the last year. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic revenue growth shows how Zhongfu Straits (Pingtan) Development is building its business over time.

How Easily Can Zhongfu Straits (Pingtan) Development Raise Cash?

Notwithstanding Zhongfu Straits (Pingtan) Development's revenue growth, it is still important to consider how it could raise more money, if it needs to. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

Zhongfu Straits (Pingtan) Development has a market capitalisation of CN¥3.5b and burnt through CN¥92m last year, which is 2.6% 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 Zhongfu Straits (Pingtan) Development's Cash Burn?

As you can probably tell by now, we're not too worried about Zhongfu Straits (Pingtan) Development's cash burn. For example, we think its cash runway suggests that the company is on a good path. But it's fair to say that its revenue growth was also very reassuring. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 1 warning sign for Zhongfu Straits (Pingtan) Development that potential shareholders should take into account before putting money into a stock.

Of course Zhongfu Straits (Pingtan) Development 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.

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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.