Here's Why We're Not Too Worried About Guangdong Jialong Food's (SZSE:002495) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Guangdong Jialong Food (SZSE:002495) shareholders be worried about its cash burn? In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Guangdong Jialong Food

When Might Guangdong Jialong Food Run Out Of Money?

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 Guangdong Jialong Food last reported its March 2024 balance sheet in April 2024, it had zero debt and cash worth CN¥272m. In the last year, its cash burn was CN¥11m. So it had a very long cash runway of many years from March 2024. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. You can see how its cash balance has changed over time in the image below.

How Well Is Guangdong Jialong Food Growing?

One thing for shareholders to keep front in mind is that Guangdong Jialong Food increased its cash burn by 29,130% in the last twelve months. While operating revenue was up over the same period, the 13% gain gives us scant comfort. Taken together, we think these growth metrics are a little worrying. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Guangdong Jialong Food has developed its business over time by checking this visualization of its revenue and earnings history.

Can Guangdong Jialong Food Raise More Cash Easily?

Even though it seems like Guangdong Jialong Food 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. 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.

Guangdong Jialong Food's cash burn of CN¥11m is about 0.7% of its CN¥1.5b 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.

So, Should We Worry About Guangdong Jialong Food's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Guangdong Jialong Food is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. 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. An in-depth examination of risks revealed 1 warning sign for Guangdong Jialong Food that readers should think about before committing capital to this stock.

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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.