We Think Shenzhen HEKEDA Precision Cleaning Equipment (SZSE:002816) Can Afford To Drive Business Growth

Just because a business does not make any money, does not mean that the stock will go down. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given this risk, we thought we'd take a look at whether Shenzhen HEKEDA Precision Cleaning Equipment (SZSE:002816) shareholders should be worried about its 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Shenzhen HEKEDA Precision Cleaning Equipment

When Might Shenzhen HEKEDA Precision Cleaning Equipment Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Shenzhen HEKEDA Precision Cleaning Equipment last reported its September 2023 balance sheet in October 2023, it had zero debt and cash worth CN¥71m. Importantly, its cash burn was CN¥24m over the trailing twelve months. Therefore, from September 2023 it had 3.0 years of cash runway. Arguably, that's a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.

Is Shenzhen HEKEDA Precision Cleaning Equipment's Revenue Growing?

Given that Shenzhen HEKEDA Precision Cleaning Equipment 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. Unfortunately, the last year has been a disappointment, with operating revenue dropping 29% during the period. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Shenzhen HEKEDA Precision Cleaning Equipment has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For Shenzhen HEKEDA Precision Cleaning Equipment To Raise More Cash For Growth?

Since its revenue growth is moving in the wrong direction, Shenzhen HEKEDA Precision Cleaning Equipment shareholders may wish to think ahead to when the company may need to raise 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. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Shenzhen HEKEDA Precision Cleaning Equipment's cash burn of CN¥24m is about 2.4% of its CN¥1.0b 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 Shenzhen HEKEDA Precision Cleaning Equipment's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Shenzhen HEKEDA Precision Cleaning Equipment's cash burn. For example, we think its cash runway suggests that the company is on a good path. While its falling revenue wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. An in-depth examination of risks revealed 1 warning sign for Shenzhen HEKEDA Precision Cleaning Equipment that readers should think about before committing capital to this 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.