We Think Shanxi Zhendong PharmaceuticalLtd (SZSE:300158) Can Afford To Drive Business Growth

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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given this risk, we thought we'd take a look at whether Shanxi Zhendong PharmaceuticalLtd (SZSE:300158) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Shanxi Zhendong PharmaceuticalLtd

Does Shanxi Zhendong PharmaceuticalLtd Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Shanxi Zhendong PharmaceuticalLtd last reported its June 2024 balance sheet in August 2024, it had zero debt and cash worth CN¥1.9b. In the last year, its cash burn was CN¥382m. That means it had a cash runway of about 5.1 years as of June 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. The image below shows how its cash balance has been changing over the last few years.

Is Shanxi Zhendong PharmaceuticalLtd's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Shanxi Zhendong PharmaceuticalLtd actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 18%. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Shanxi Zhendong PharmaceuticalLtd is building its business over time.

How Hard Would It Be For Shanxi Zhendong PharmaceuticalLtd To Raise More Cash For Growth?

Since its revenue growth is moving in the wrong direction, Shanxi Zhendong PharmaceuticalLtd 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. Commonly, a business will sell new shares in itself to raise cash and drive growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Shanxi Zhendong PharmaceuticalLtd has a market capitalisation of CN¥3.9b and burnt through CN¥382m last year, which is 9.8% of the company's market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

How Risky Is Shanxi Zhendong PharmaceuticalLtd's Cash Burn Situation?

As you can probably tell by now, we're not too worried about Shanxi Zhendong PharmaceuticalLtd'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. 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. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 1 warning sign for Shanxi Zhendong PharmaceuticalLtd that potential shareholders should take into account before putting money into a stock.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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.