Here's Why We're Not Too Worried About Harbin Xinguang Optic-Electronics TechnologyLtd's (SHSE:688011) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given this risk, we thought we'd take a look at whether Harbin Xinguang Optic-Electronics TechnologyLtd (SHSE:688011) 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'. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Harbin Xinguang Optic-Electronics TechnologyLtd

Does Harbin Xinguang Optic-Electronics 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. In September 2024, Harbin Xinguang Optic-Electronics TechnologyLtd had CN¥631m in cash, and was debt-free. Looking at the last year, the company burnt through CN¥52m. So it had a very long cash runway of many years from September 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. You can see how its cash balance has changed over time in the image below.

How Well Is Harbin Xinguang Optic-Electronics TechnologyLtd Growing?

Notably, Harbin Xinguang Optic-Electronics TechnologyLtd actually ramped up its cash burn very hard and fast in the last year, by 163%, signifying heavy investment in the business. That does give us pause, and we can't take much solace in the operating revenue growth of 2.8% in the same time frame. Considering both these metrics, we're a little concerned about how the company is developing. 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 Harbin Xinguang Optic-Electronics TechnologyLtd is building its business over time.

How Hard Would It Be For Harbin Xinguang Optic-Electronics TechnologyLtd To Raise More Cash For Growth?

While Harbin Xinguang Optic-Electronics TechnologyLtd 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. 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.

Harbin Xinguang Optic-Electronics TechnologyLtd's cash burn of CN¥52m is about 3.0% of its CN¥1.7b 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.

So, Should We Worry About Harbin Xinguang Optic-Electronics TechnologyLtd's Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Harbin Xinguang Optic-Electronics TechnologyLtd's cash runway was relatively promising. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. An in-depth examination of risks revealed 1 warning sign for Harbin Xinguang Optic-Electronics TechnologyLtd that readers should think about before committing capital to this stock.

Of course Harbin Xinguang Optic-Electronics TechnologyLtd 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.