We're Not Very Worried About Shenzhen GuoHua Network Security Technology's (SZSE:000004) Cash Burn Rate

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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

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. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Shenzhen GuoHua Network Security Technology

How Long Is Shenzhen GuoHua Network Security Technology's 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 March 2024, Shenzhen GuoHua Network Security Technology had cash of CN¥89m and no debt. In the last year, its cash burn was CN¥11m. That means it had a cash runway of about 7.7 years as of March 2024. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Shenzhen GuoHua Network Security Technology Growing?

Happily, Shenzhen GuoHua Network Security Technology is travelling in the right direction when it comes to its cash burn, which is down 68% over the last year. But it was a bit disconcerting to see operating revenue down 41% in that time. On balance, we'd say the company is improving over time. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Shenzhen GuoHua Network Security Technology is building its business over time.

Can Shenzhen GuoHua Network Security Technology Raise More Cash Easily?

While Shenzhen GuoHua Network Security Technology seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. 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. 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).

Since it has a market capitalisation of CN¥1.5b, Shenzhen GuoHua Network Security Technology's CN¥11m in cash burn equates to about 0.8% of its 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. For example, we think its cash runway suggests that the company is on a good path. While we must concede that its falling revenue is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. 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. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for Shenzhen GuoHua Network Security Technology that potential shareholders should take into account before putting money into a stock.

Of course Shenzhen GuoHua Network Security Technology may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com