We Think Guangzhou S.P.I Design (SZSE:300844) Can Afford To Drive Business Growth

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 Guangzhou S.P.I Design (SZSE:300844) 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Guangzhou S.P.I Design

Does Guangzhou S.P.I Design 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. Guangzhou S.P.I Design has such a small amount of debt that we'll set it aside, and focus on the CN¥483m in cash it held at September 2023. Importantly, its cash burn was CN¥90m over the trailing twelve months. So it had a cash runway of about 5.4 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. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Guangzhou S.P.I Design Growing?

We reckon the fact that Guangzhou S.P.I Design managed to shrink its cash burn by 27% over the last year is rather encouraging. Unfortunately, however, operating revenue declined by 23% during the period. Considering both these factors, we're not particularly excited by its growth profile. In reality, this article only makes a short study of the company's growth data. You can take a look at how Guangzhou S.P.I Design has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Guangzhou S.P.I Design Raise Cash?

We are certainly impressed with the progress Guangzhou S.P.I Design 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. 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.

Since it has a market capitalisation of CN¥1.6b, Guangzhou S.P.I Design's CN¥90m in cash burn equates to about 5.7% of its 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 Guangzhou S.P.I Design's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Guangzhou S.P.I Design is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for Guangzhou S.P.I Design that potential shareholders should take into account before putting money into a stock.

Of course Guangzhou S.P.I Design 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 that insiders are buying.

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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.