We're Hopeful That Shanxi Zhendong PharmaceuticalLtd (SZSE:300158) Will Use Its Cash Wisely

There's no doubt that money can be made by owning shares of unprofitable businesses. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for Shanxi Zhendong PharmaceuticalLtd (SZSE:300158) shareholders is whether they should be concerned by its rate of 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Shanxi Zhendong PharmaceuticalLtd

When Might Shanxi Zhendong PharmaceuticalLtd 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. As at September 2024, Shanxi Zhendong PharmaceuticalLtd had cash of CN¥1.8b and no debt. Importantly, its cash burn was CN¥414m over the trailing twelve months. So it had a cash runway of about 4.3 years from September 2024. There's no doubt that this is a reassuringly long runway. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Shanxi Zhendong PharmaceuticalLtd Growing?

Notably, Shanxi Zhendong PharmaceuticalLtd actually ramped up its cash burn very hard and fast in the last year, by 116%, signifying heavy investment in the business. As if that's not bad enough, the operating revenue also dropped by 15%, making us very wary indeed. 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. 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?

Shanxi Zhendong PharmaceuticalLtd seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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.

Since it has a market capitalisation of CN¥4.5b, Shanxi Zhendong PharmaceuticalLtd's CN¥414m in cash burn equates to about 9.2% of its market value. 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 Shanxi Zhendong PharmaceuticalLtd's Cash Burn Situation?

On this analysis of Shanxi Zhendong PharmaceuticalLtd's cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. 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 Shanxi Zhendong PharmaceuticalLtd 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 interesting companies, 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.