We're Interested To See How Zhongfu Straits (Pingtan) Development (SZSE:000592) Uses Its Cash Hoard To Grow

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Zhongfu Straits (Pingtan) Development (SZSE:000592) shareholders is whether they should be concerned by its rate of 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'.

See our latest analysis for Zhongfu Straits (Pingtan) Development

When Might Zhongfu Straits (Pingtan) Development 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 Zhongfu Straits (Pingtan) Development last reported its March 2024 balance sheet in April 2024, it had zero debt and cash worth CN¥744m. Importantly, its cash burn was CN¥92m over the trailing twelve months. So it had a cash runway of about 8.1 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. Depicted below, you can see how its cash holdings have changed over time.

Is Zhongfu Straits (Pingtan) Development's Revenue Growing?

Given that Zhongfu Straits (Pingtan) Development 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. It's nice to see that operating revenue was up 37% in the last year. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Zhongfu Straits (Pingtan) Development is growing revenue over time by checking this visualization of past revenue growth.

How Easily Can Zhongfu Straits (Pingtan) Development Raise Cash?

Notwithstanding Zhongfu Straits (Pingtan) Development's revenue growth, it is still important to consider how it could raise more money, if it needs to. 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 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).

Zhongfu Straits (Pingtan) Development's cash burn of CN¥92m is about 3.3% of its CN¥2.8b market capitalisation. 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.

How Risky Is Zhongfu Straits (Pingtan) Development's Cash Burn Situation?

As you can probably tell by now, we're not too worried about Zhongfu Straits (Pingtan) Development's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. But it's fair to say that its revenue growth was also very reassuring. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. An in-depth examination of risks revealed 1 warning sign for Zhongfu Straits (Pingtan) Development that readers should think about before committing capital to this stock.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies with significant insider holdings, and this list of stocks growth stocks (according to analyst forecasts)

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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.

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