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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So, the natural question for Shanghai Taihe Water Technology DevelopmentLtd (SHSE:605081) shareholders is whether they should be concerned by its rate of 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.
View our latest analysis for Shanghai Taihe Water Technology DevelopmentLtd
How Long Is Shanghai Taihe Water Technology DevelopmentLtd’s Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. In June 2024, Shanghai Taihe Water Technology DevelopmentLtd had CN¥306m in cash, and was debt-free. In the last year, its cash burn was CN¥111m. Therefore, from June 2024 it had 2.8 years of cash runway. That’s decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.
How Well Is Shanghai Taihe Water Technology DevelopmentLtd Growing?
It was fairly positive to see that Shanghai Taihe Water Technology DevelopmentLtd reduced its cash burn by 22% during the last year. Unfortunately, however, operating revenue declined by 5.6% during the period. On balance, we’d say the company is improving over time. 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 Shanghai Taihe Water Technology DevelopmentLtd is building its business over time.
How Hard Would It Be For Shanghai Taihe Water Technology DevelopmentLtd To Raise More Cash For Growth?
Even though it seems like Shanghai Taihe Water Technology DevelopmentLtd is developing its business nicely, we still like to consider how easily it could raise more money to accelerate 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.
Shanghai Taihe Water Technology DevelopmentLtd has a market capitalisation of CN¥1.3b and burnt through CN¥111m last year, which is 8.5% of the company’s 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.
So, Should We Worry About Shanghai Taihe Water Technology DevelopmentLtd’s Cash Burn?
As you can probably tell by now, we’re not too worried about Shanghai Taihe Water Technology DevelopmentLtd’s cash burn. 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. Considering all the factors discussed in this article, we’re not overly concerned about the company’s cash burn, although we do think shareholders should keep an eye on how it develops. On another note, we conducted an in-depth investigation of the company, and identified 2 warning signs for Shanghai Taihe Water Technology DevelopmentLtd (1 is concerning!) that you should be aware of before investing here.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies with significant insider holdings, and this list of stocks growth stocks (according to analyst forecasts)
New: Manage All Your Stock Portfolios in One Place
We’ve created the ultimate portfolio companion for stock investors, and it’s free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
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.