We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given this risk, we thought we'd take a look at whether Halo Microelectronics (SHSE:688173) 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

How Long Is Halo Microelectronics' 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. Halo Microelectronics has such a small amount of debt that we'll set it aside, and focus on the CN¥1.2b in cash it held at June 2024. Importantly, its cash burn was CN¥228m over the trailing twelve months. That means it had a cash runway of about 5.1 years as of June 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. The image below shows how its cash balance has been changing over the last few years.

How Well Is Halo Microelectronics Growing?

On balance, we think it's mildly positive that Halo Microelectronics trimmed its cash burn by 20% over the last twelve months. And considering that its operating revenue gained 33% during that period, that's great to see. It seems to be growing nicely. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic revenue growth shows how Halo Microelectronics is building its business over time.

Can Halo Microelectronics Raise More Cash Easily?

There's no doubt Halo Microelectronics 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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.

Halo Microelectronics' cash burn of CN¥228m is about 5.8% of its CN¥3.9b market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

So, Should We Worry About Halo Microelectronics' Cash Burn?

As you can probably tell by now, we're not too worried about Halo Microelectronics' cash burn. For example, we think its cash runway suggests that the company is on a good path. On this analysis its cash burn reduction was its weakest feature, but we are not concerned about it. 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. On another note, we conducted an in-depth investigation of the company, and identified 2 warning signs for Halo Microelectronics (1 shouldn't be ignored!) that you should be aware of before investing here.

Of course Halo 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.