Just because a business does not make any money, does not mean that the stock will go down. 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 the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So, the natural question for Shanxi Zhendong PharmaceuticalLtd (SZSE:300158) shareholders is whether they should be concerned by its rate of 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.

Does Shanxi Zhendong PharmaceuticalLtd 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, Shanxi Zhendong PharmaceuticalLtd had cash of CN¥1.8b and no debt. In the last year, its cash burn was CN¥414m. So it had a cash runway of about 4.3 years from September 2024. A runway of this length affords the company the time and space it needs to develop the business. The image below shows how its cash balance has been changing over the last few years.

How Well Is Shanxi Zhendong PharmaceuticalLtd Growing?

Notably, Shanxi Zhendong PharmaceuticalLtd actually ramped up its cash burn very hard and fast in the last year, by 116%, signifying heavy investment in the business. As if that's not bad enough, the operating revenue also dropped by 15%, making us very wary indeed. Taken together, we think these growth metrics are a little worrying. 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 Hard Would It Be For Shanxi Zhendong PharmaceuticalLtd To Raise More Cash For Growth?

Shanxi Zhendong PharmaceuticalLtd seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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).

Since it has a market capitalisation of CN¥4.8b, Shanxi Zhendong PharmaceuticalLtd's CN¥414m in cash burn equates to about 8.6% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

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

On this analysis of Shanxi Zhendong PharmaceuticalLtd's cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Shanxi Zhendong PharmaceuticalLtd's situation. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 1 warning sign for Shanxi Zhendong PharmaceuticalLtd that potential shareholders should take into account before putting money into a stock.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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.