We're Not Very Worried About Ningbo Xianfeng New MaterialLtd's (SZSE:300163) Cash Burn Rate

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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether Ningbo Xianfeng New MaterialLtd (SZSE:300163) shareholders should 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). Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for Ningbo Xianfeng New MaterialLtd

How Long Is Ningbo Xianfeng New MaterialLtd's Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Ningbo Xianfeng New MaterialLtd last reported its March 2024 balance sheet in April 2024, it had zero debt and cash worth CN¥55m. In the last year, its cash burn was CN¥20m. That means it had a cash runway of about 2.7 years as of March 2024. Arguably, that's a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.

Is Ningbo Xianfeng New MaterialLtd's Revenue Growing?

Given that Ningbo Xianfeng New MaterialLtd 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 18% during the period. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Ningbo Xianfeng New MaterialLtd is building its business over time.

How Easily Can Ningbo Xianfeng New MaterialLtd Raise Cash?

Since its revenue growth is moving in the wrong direction, Ningbo Xianfeng New MaterialLtd shareholders may wish to think ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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 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).

Ningbo Xianfeng New MaterialLtd has a market capitalisation of CN¥659m and burnt through CN¥20m last year, which is 3.1% 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.

Is Ningbo Xianfeng New MaterialLtd's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Ningbo Xianfeng New MaterialLtd'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. On another note, Ningbo Xianfeng New MaterialLtd has 2 warning signs (and 1 which is significant) we think you should know about.

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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.