Companies Like ShenZhen Consys Science&Technology (SHSE:688788) Are In A Position To Invest In Growth

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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for ShenZhen Consys Science&Technology (SHSE:688788) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for ShenZhen Consys Science&Technology

Does ShenZhen Consys Science&Technology 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 2023, ShenZhen Consys Science&Technology had cash of CN¥1.4b and no debt. In the last year, its cash burn was CN¥218m. So it had a cash runway of about 6.2 years from September 2023. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.

How Well Is ShenZhen Consys Science&Technology Growing?

One thing for shareholders to keep front in mind is that ShenZhen Consys Science&Technology increased its cash burn by 283% in the last twelve months. While that's concerning on it's own, the fact that operating revenue was actually down 6.9% over the same period makes us positively tremulous. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. 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 ShenZhen Consys Science&Technology is building its business over time.

How Hard Would It Be For ShenZhen Consys Science&Technology To Raise More Cash For Growth?

Even though it seems like ShenZhen Consys Science&Technology 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. 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).

ShenZhen Consys Science&Technology has a market capitalisation of CN¥2.7b and burnt through CN¥218m last year, which is 8.1% of the company's market value. 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 ShenZhen Consys Science&Technology's Cash Burn Situation?

On this analysis of ShenZhen Consys Science&Technology's cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 1 warning sign for ShenZhen Consys Science&Technology that investors should know when investing in the 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.