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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should Shanghai DragonNet TechnologyLtd (SZSE:300245) 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
How Long Is Shanghai DragonNet TechnologyLtd's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2024, Shanghai DragonNet TechnologyLtd had cash of CN¥640m and no debt. In the last year, its cash burn was CN¥72m. That means it had a cash runway of about 9.0 years as of September 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.
Is Shanghai DragonNet TechnologyLtd's Revenue Growing?
Given that Shanghai DragonNet TechnologyLtd 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. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 27%. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Shanghai DragonNet TechnologyLtd has developed its business over time by checking this visualization of its revenue and earnings history.
How Hard Would It Be For Shanghai DragonNet TechnologyLtd To Raise More Cash For Growth?
Given its problematic fall in revenue, Shanghai DragonNet TechnologyLtd shareholders should consider how the company could fund its growth, if it turns out it needs more cash. 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. 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.
Shanghai DragonNet TechnologyLtd's cash burn of CN¥72m is about 1.4% of its CN¥5.2b market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
Is Shanghai DragonNet TechnologyLtd's Cash Burn A Worry?
It may already be apparent to you that we're relatively comfortable with the way Shanghai DragonNet TechnologyLtd is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. 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. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for Shanghai DragonNet TechnologyLtd that investors should know when investing in the stock.
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.
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