There's no doubt that money can be made by owning shares of unprofitable businesses. For example, QuantumCTek (SHSE:688027) shareholders have done very well over the last year, with the share price soaring by 125%. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So notwithstanding the buoyant share price, we think it's well worth asking whether QuantumCTek's cash burn is too risky. 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

When Might QuantumCTek Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2024, QuantumCTek had cash of CN¥811m and no debt. Importantly, its cash burn was CN¥115m over the trailing twelve months. Therefore, from September 2024 it had 7.1 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.

Is QuantumCTek's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because QuantumCTek actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Although it's hardly brilliant growth, it's good to see the company grew revenue by 7.2% in the last year. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can QuantumCTek Raise More Cash Easily?

While QuantumCTek is showing solid revenue growth, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. 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.

QuantumCTek's cash burn of CN¥115m is about 0.5% of its CN¥24b market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

How Risky Is QuantumCTek's Cash Burn Situation?

As you can probably tell by now, we're not too worried about QuantumCTek's cash burn. For example, we think its cash runway suggests that the company is on a good path. On this analysis its revenue growth was its weakest feature, but we are not concerned about it. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. An in-depth examination of risks revealed 1 warning sign for QuantumCTek that readers should think about before committing capital to this stock.

Of course QuantumCTek 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.