Here's Why We're Not Too Worried About Beijing SunwayWorld Science & Technology's (SZSE:301159) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. 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.

Given this risk, we thought we'd take a look at whether Beijing SunwayWorld Science & Technology (SZSE:301159) shareholders should 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Beijing SunwayWorld Science & Technology

How Long Is Beijing SunwayWorld Science & Technology's Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Beijing SunwayWorld Science & Technology last reported its September 2023 balance sheet in October 2023, it had zero debt and cash worth CN¥406m. Looking at the last year, the company burnt through CN¥116m. So it had a cash runway of about 3.5 years from September 2023. A runway of this length affords the company the time and space it needs to develop the business. You can see how its cash balance has changed over time in the image below.

How Well Is Beijing SunwayWorld Science & Technology Growing?

Beijing SunwayWorld Science & Technology boosted investment sharply in the last year, with cash burn ramping by 62%. That does give us pause, and we can't take much solace in the operating revenue growth of 4.4% in the same time frame. Taken together, we think these growth metrics are a little worrying. In reality, this article only makes a short study of the company's growth data. You can take a look at how Beijing SunwayWorld Science & Technology has developed its business over time by checking this visualization of its revenue and earnings history.

Can Beijing SunwayWorld Science & Technology Raise More Cash Easily?

Beijing SunwayWorld Science & 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Beijing SunwayWorld Science & Technology's cash burn of CN¥116m is about 5.2% of its CN¥2.2b market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is Beijing SunwayWorld Science & Technology's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Beijing SunwayWorld Science & 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 increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for Beijing SunwayWorld Science & Technology that potential shareholders should take into account before putting money into a stock.

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