We Think Shandong Dongyue Organosilicon Materials (SZSE:300821) Can Easily 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 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 while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So, the natural question for Shandong Dongyue Organosilicon Materials (SZSE:300821) 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Shandong Dongyue Organosilicon Materials

When Might Shandong Dongyue Organosilicon Materials Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2024, Shandong Dongyue Organosilicon Materials had CN¥650m in cash, and was debt-free. In the last year, its cash burn was CN¥98m. Therefore, from June 2024 it had 6.6 years of cash runway. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.

How Well Is Shandong Dongyue Organosilicon Materials Growing?

Shandong Dongyue Organosilicon Materials managed to reduce its cash burn by 84% over the last twelve months, which suggests it's on the right flight path. But it was a bit disconcerting to see operating revenue down 10% in that time. We think it is growing rather well, upon reflection. In reality, this article only makes a short study of the company's growth data. You can take a look at how Shandong Dongyue Organosilicon Materials has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Shandong Dongyue Organosilicon Materials Raise Cash?

We are certainly impressed with the progress Shandong Dongyue Organosilicon Materials 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. Companies can raise capital through either debt or equity. 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).

Shandong Dongyue Organosilicon Materials has a market capitalisation of CN¥9.9b and burnt through CN¥98m last year, which is 1.0% of the company's market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

Is Shandong Dongyue Organosilicon Materials' Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Shandong Dongyue Organosilicon Materials' cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 1 warning sign for Shandong Dongyue Organosilicon Materials that investors should know when investing in the 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.