Here's Why We're Not Too Worried About Ningbo GQY Video & Telecom's (SZSE:300076) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. 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. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So, the natural question for Ningbo GQY Video & Telecom (SZSE:300076) shareholders is whether they should be concerned by its rate of 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Ningbo GQY Video & Telecom

How Long Is Ningbo GQY Video & Telecom's 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, Ningbo GQY Video & Telecom had CN¥513m in cash, and was debt-free. Importantly, its cash burn was CN¥100m over the trailing twelve months. So it had a cash runway of about 5.1 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.

How Well Is Ningbo GQY Video & Telecom Growing?

Notably, Ningbo GQY Video & Telecom actually ramped up its cash burn very hard and fast in the last year, by 107%, signifying heavy investment in the business. While that's concerning on it's own, the fact that operating revenue was actually down 27% over the same period makes us positively tremulous. Considering these two factors together makes us nervous about the direction the company seems to be heading. 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 Ningbo GQY Video & Telecom is building its business over time.

How Easily Can Ningbo GQY Video & Telecom Raise Cash?

Ningbo GQY Video & Telecom 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. Companies can raise capital through either debt or equity. 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.

Ningbo GQY Video & Telecom has a market capitalisation of CN¥3.2b and burnt through CN¥100m last year, which is 3.1% of the company's market value. 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 Ningbo GQY Video & Telecom's Cash Burn A Worry?

On this analysis of Ningbo GQY Video & Telecom's cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. 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. 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 Ningbo GQY Video & Telecom that investors should know when investing in the stock.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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.