Shanghai DragonNet TechnologyLtd (SZSE:300245) Is In A Strong Position To Grow Its Business

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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Shanghai DragonNet TechnologyLtd (SZSE:300245) shareholders 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'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for Shanghai DragonNet TechnologyLtd

Does Shanghai DragonNet TechnologyLtd 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. When Shanghai DragonNet TechnologyLtd last reported its September 2024 balance sheet in October 2024, it had zero debt and cash worth CN¥640m. Importantly, its cash burn was CN¥72m over the trailing twelve months. So it had a cash runway of about 9.0 years from September 2024. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.

Is Shanghai DragonNet TechnologyLtd's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Shanghai DragonNet TechnologyLtd actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Unfortunately, the last year has been a disappointment, with operating revenue dropping 27% during the period. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Shanghai DragonNet TechnologyLtd is building its business over time.

How Hard Would It Be For Shanghai DragonNet TechnologyLtd To Raise More Cash For Growth?

Since its revenue growth is moving in the wrong direction, Shanghai DragonNet TechnologyLtd 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. 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.

Shanghai DragonNet TechnologyLtd has a market capitalisation of CN¥3.9b and burnt through CN¥72m last year, which is 1.8% 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.

How Risky Is Shanghai DragonNet TechnologyLtd's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Shanghai DragonNet TechnologyLtd is burning through its cash. In particular, we think its cash runway 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. 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. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for Shanghai DragonNet TechnologyLtd that investors should know when investing in the stock.

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.