We Think Shenzhen GuoHua Network Security Technology (SZSE:000004) 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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given this risk, we thought we'd take a look at whether Shenzhen GuoHua Network Security Technology (SZSE:000004) shareholders should be worried about its 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). Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Shenzhen GuoHua Network Security Technology

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

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, Shenzhen GuoHua Network Security Technology had cash of CN¥64m and no debt. In the last year, its cash burn was CN¥23m. That means it had a cash runway of about 2.8 years as of September 2024. That's decent, giving the company a couple years to develop its business. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Shenzhen GuoHua Network Security Technology Growing?

We reckon the fact that Shenzhen GuoHua Network Security Technology managed to shrink its cash burn by 34% over the last year is rather encouraging. Unfortunately, however, operating revenue declined by 36% during the period. Considering both these factors, we're not particularly excited by its growth profile. 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.

How Hard Would It Be For Shenzhen GuoHua Network Security Technology To Raise More Cash For Growth?

While Shenzhen GuoHua Network Security Technology seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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 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 has a market capitalisation of CN¥2.7b and burnt through CN¥23m last year, which is 0.8% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

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 burn relative to its market cap 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. 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, Shenzhen GuoHua Network Security Technology has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.