We Think Shanghai Taihe Water Technology DevelopmentLtd (SHSE:605081) Can Afford To Drive Business Growth

We can readily understand why investors are attracted to unprofitable companies. 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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should Shanghai Taihe Water Technology DevelopmentLtd (SHSE:605081) shareholders be worried about its 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.

View our latest analysis for Shanghai Taihe Water Technology DevelopmentLtd

Does Shanghai Taihe Water Technology DevelopmentLtd 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. In March 2024, Shanghai Taihe Water Technology DevelopmentLtd had CN¥357m in cash, and was debt-free. Importantly, its cash burn was CN¥104m over the trailing twelve months. So it had a cash runway of about 3.4 years from March 2024. A runway of this length affords the company the time and space it needs to develop the business. Depicted below, you can see how its cash holdings have changed over time.

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 24% during the last year. Unfortunately, however, operating revenue declined by 15% during the period. In light of the data above, we're fairly sanguine about the business growth trajectory. 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 Easily Can Shanghai Taihe Water Technology DevelopmentLtd Raise Cash?

We are certainly impressed with the progress Shanghai Taihe Water Technology DevelopmentLtd has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster 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's cash burn of CN¥104m is about 7.5% of its CN¥1.4b market capitalisation. 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.

So, Should We Worry About Shanghai Taihe Water Technology DevelopmentLtd's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Shanghai Taihe Water Technology DevelopmentLtd is burning through its cash. 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. 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. Taking a deeper dive, we've spotted 2 warning signs for Shanghai Taihe Water Technology DevelopmentLtd you should be aware of, and 1 of them is a bit unpleasant.

Of course Shanghai Taihe Water Technology DevelopmentLtd may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com