We're Not Worried About Shouyao Holdings (Beijing)'s (SHSE:688197) Cash Burn

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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 should Shouyao Holdings (Beijing) (SHSE:688197) 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). 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 Shouyao Holdings (Beijing)

When Might Shouyao Holdings (Beijing) Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Shouyao Holdings (Beijing) last reported its March 2024 balance sheet in April 2024, it had zero debt and cash worth CN¥810m. In the last year, its cash burn was CN¥185m. That means it had a cash runway of about 4.4 years as of March 2024. There's no doubt that this is a reassuringly long runway. However, if we extrapolate the company's recent cash burn trend, then it would have a longer cash run way. You can see how its cash balance has changed over time in the image below.

How Is Shouyao Holdings (Beijing)'s Cash Burn Changing Over Time?

In our view, Shouyao Holdings (Beijing) doesn't yet produce significant amounts of operating revenue, since it reported just CN¥5.2m in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Over the last year its cash burn actually increased by 17%, which suggests that management are increasing investment in future growth, but not too quickly. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Easily Can Shouyao Holdings (Beijing) Raise Cash?

Given its cash burn trajectory, Shouyao Holdings (Beijing) shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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).

Shouyao Holdings (Beijing)'s cash burn of CN¥185m is about 3.5% of its CN¥5.4b 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.

So, Should We Worry About Shouyao Holdings (Beijing)'s Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Shouyao Holdings (Beijing) 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. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. 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. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Shouyao Holdings (Beijing) (of which 1 is a bit concerning!) you should know about.

Of course Shouyao Holdings (Beijing) 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 with high insider ownership.

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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.