There's no doubt that money can be made by owning shares of unprofitable businesses. 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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should Shanxi Zhendong PharmaceuticalLtd (SZSE:300158) shareholders be worried about its cash burn? 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. Let's start with an examination of the business' cash, relative to its cash burn.

How Long Is Shanxi Zhendong PharmaceuticalLtd's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2024, Shanxi Zhendong PharmaceuticalLtd had cash of CN¥1.9b and no debt. In the last year, its cash burn was CN¥382m. So it had a cash runway of about 5.1 years from June 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.

Is Shanxi Zhendong PharmaceuticalLtd's Revenue Growing?

Given that Shanxi Zhendong PharmaceuticalLtd actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. Unfortunately, the last year has been a disappointment, with operating revenue dropping 18% during the period. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Shanxi Zhendong PharmaceuticalLtd is building its business over time.

How Easily Can Shanxi Zhendong PharmaceuticalLtd Raise Cash?

Since its revenue growth is moving in the wrong direction, Shanxi Zhendong PharmaceuticalLtd shareholders may wish to think ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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).

Shanxi Zhendong PharmaceuticalLtd's cash burn of CN¥382m is about 11% of its CN¥3.6b market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

How Risky Is Shanxi Zhendong PharmaceuticalLtd's Cash Burn Situation?

As you can probably tell by now, we're not too worried about Shanxi Zhendong PharmaceuticalLtd's cash burn. 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. We think it's very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what Shanxi Zhendong PharmaceuticalLtd's CEO gets paid each year.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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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.