We Think Shenzhen Hemei GroupLTD (SZSE:002356) Can 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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Shenzhen Hemei GroupLTD (SZSE:002356) 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Shenzhen Hemei GroupLTD

Does Shenzhen Hemei GroupLTD Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Shenzhen Hemei GroupLTD last reported its September 2024 balance sheet in October 2024, it had zero debt and cash worth CN¥316m. In the last year, its cash burn was CN¥168m. So it had a cash runway of approximately 23 months from September 2024. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Shenzhen Hemei GroupLTD Growing?

It was quite stunning to see that Shenzhen Hemei GroupLTD increased its cash burn by 4,093% over the last year. On the bright side, at least operating revenue was up 24% over the same period, giving some cause for hope. 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. You can take a look at how Shenzhen Hemei GroupLTD has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For Shenzhen Hemei GroupLTD To Raise More Cash For Growth?

Even though it seems like Shenzhen Hemei GroupLTD is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. 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. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Shenzhen Hemei GroupLTD has a market capitalisation of CN¥5.0b and burnt through CN¥168m last year, which is 3.3% 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 Shenzhen Hemei GroupLTD's Cash Burn Situation?

On this analysis of Shenzhen Hemei GroupLTD's cash burn, we think its cash burn relative to its market cap 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. For us, it's always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the Shenzhen Hemei GroupLTD CEO receives in total remuneration.

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.