Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Ningbo GQY Video & Telecom (SZSE:300076) 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 Ningbo GQY Video & Telecom Have A Long Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at September 2024, Ningbo GQY Video & Telecom had cash of CN¥513m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was CN¥100m. Therefore, from September 2024 it had 5.1 years of cash runway. 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 Ningbo GQY Video & Telecom Growing?

Notably, Ningbo GQY Video & Telecom actually ramped up its cash burn very hard and fast in the last year, by 107%, signifying heavy investment in the business. As if that's not bad enough, the operating revenue also dropped by 27%, making us very wary indeed. Considering these two factors together makes us nervous about the direction the company seems to be heading. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Ningbo GQY Video & Telecom has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For Ningbo GQY Video & Telecom To Raise More Cash For Growth?

Even though it seems like Ningbo GQY Video & Telecom is developing its business nicely, we still like to consider how easily it could raise more money to accelerate 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).

Ningbo GQY Video & Telecom's cash burn of CN¥100m is about 3.6% of its CN¥2.7b 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.

How Risky Is Ningbo GQY Video & Telecom's Cash Burn Situation?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Ningbo GQY Video & Telecom's cash runway was relatively promising. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Taking a deeper dive, we've spotted 2 warning signs for Ningbo GQY Video & Telecom you should be aware of, and 1 of them is potentially serious.

Of course Ningbo GQY Video & Telecom 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.