Ningbo GQY Video & Telecom (SZSE:300076) Is In A Good Position To Deliver On Growth Plans

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Ningbo GQY Video & Telecom (SZSE:300076) shareholders is whether they should be concerned by its rate of 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.

See our latest analysis for Ningbo GQY Video & Telecom

When Might Ningbo GQY Video & Telecom Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In March 2024, Ningbo GQY Video & Telecom had CN¥576m in cash, and was debt-free. In the last year, its cash burn was CN¥74m. So it had a cash runway of about 7.7 years from March 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. The image below shows how its cash balance has been changing over the last few years.

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 122%, signifying heavy investment in the business. As if that's not bad enough, the operating revenue also dropped by 6.7%, making us very wary indeed. 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. You can take a look at how Ningbo GQY Video & Telecom has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For Ningbo GQY Video & Telecom To Raise More Cash For Growth?

Even though it seems like Ningbo GQY Video & Telecom is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Ningbo GQY Video & Telecom has a market capitalisation of CN¥1.5b and burnt through CN¥74m last year, which is 5.1% of the company's market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

How Risky Is Ningbo GQY Video & Telecom's Cash Burn Situation?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Ningbo GQY Video & Telecom'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. Taking an in-depth view of risks, we've identified 2 warning signs for Ningbo GQY Video & Telecom that you should be aware of before investing.

Of course Ningbo GQY Video & Telecom 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 that insiders are buying.

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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.