Here's Why We're Not Too Worried About Shenzhen GuoHua Network Security Technology's (SZSE:000004) Cash Burn Situation

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 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. 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 Shenzhen GuoHua Network Security Technology (SZSE:000004) 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.

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Does Shenzhen GuoHua Network Security Technology Have A Long Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at September 2024, Shenzhen GuoHua Network Security Technology had cash of CN¥64m and no debt. In the last year, its cash burn was CN¥23m. Therefore, from September 2024 it had 2.8 years of cash runway. Arguably, that's a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.

View our latest analysis for Shenzhen GuoHua Network Security Technology

How Well Is Shenzhen GuoHua Network Security Technology Growing?

It was fairly positive to see that Shenzhen GuoHua Network Security Technology reduced its cash burn by 34% during the last year. But the revenue dip of 36% in the same period was a bit concerning. In light of the data above, we're fairly sanguine about the business growth trajectory. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Shenzhen GuoHua Network Security Technology has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Shenzhen GuoHua Network Security Technology Raise Cash?

Shenzhen GuoHua Network Security Technology 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. 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).

Shenzhen GuoHua Network Security Technology has a market capitalisation of CN¥1.3b and burnt through CN¥23m last year, which is 1.7% 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 Shenzhen GuoHua Network Security Technology's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Shenzhen GuoHua Network Security Technology's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While its falling revenue wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. 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 2 warning signs for Shenzhen GuoHua Network Security Technology (of which 1 doesn't sit too well with us!) you should know about.

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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.