Shenzhen GuoHua Network Security Technology (SZSE:000004) Is In A Good Position To Deliver On Growth Plans

We can readily understand why investors are attracted to unprofitable companies. 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 should Shenzhen GuoHua Network Security Technology (SZSE:000004) shareholders 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for Shenzhen GuoHua Network Security Technology

When Might Shenzhen GuoHua Network Security Technology Run Out Of Money?

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. In September 2023, Shenzhen GuoHua Network Security Technology had CN¥88m in cash, and was debt-free. In the last year, its cash burn was CN¥34m. That means it had a cash runway of about 2.6 years as of September 2023. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.

Is Shenzhen GuoHua Network Security Technology's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Shenzhen GuoHua Network Security Technology 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 20%. In reality, this article only makes a short study of the company's growth data. 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.

Can Shenzhen GuoHua Network Security Technology Raise More Cash Easily?

Since its revenue growth is moving in the wrong direction, Shenzhen GuoHua Network Security Technology shareholders may wish to think ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. 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.

Shenzhen GuoHua Network Security Technology's cash burn of CN¥34m is about 2.3% of its CN¥1.5b market capitalisation. 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?

It may already be apparent to you that we're relatively comfortable with the way Shenzhen GuoHua Network Security Technology is burning through its cash. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. 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. On another note, we conducted an in-depth investigation of the company, and identified 2 warning signs for Shenzhen GuoHua Network Security Technology (1 shouldn't be ignored!) that you should be aware of before investing here.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, 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.