We're Not Very Worried About Vtron GroupLtd's (SZSE:002308) Cash Burn Rate

There's no doubt that money can be made by owning shares of unprofitable businesses. 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. 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 Vtron GroupLtd (SZSE:002308) shareholders should be worried about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Vtron GroupLtd

Does Vtron GroupLtd Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Vtron GroupLtd last reported its September 2023 balance sheet in October 2023, it had zero debt and cash worth CN¥1.0b. In the last year, its cash burn was CN¥461m. That means it had a cash runway of about 2.2 years as of September 2023. Arguably, that's a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.

Is Vtron GroupLtd's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Vtron GroupLtd 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 29% during the period. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Vtron GroupLtd is building its business over time.

How Easily Can Vtron GroupLtd Raise Cash?

Since its revenue growth is moving in the wrong direction, Vtron GroupLtd shareholders may wish to think ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Since it has a market capitalisation of CN¥2.4b, Vtron GroupLtd's CN¥461m in cash burn equates to about 19% of its market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

How Risky Is Vtron GroupLtd's Cash Burn Situation?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Vtron GroupLtd's cash runway was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Vtron GroupLtd's situation. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 1 warning sign for Vtron GroupLtd 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 interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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

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.