We're Interested To See How Joyware ElectronicsLtd (SZSE:300270) Uses Its Cash Hoard To Grow

Just because a business does not make any money, does not mean that the stock will go down. 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.

So should Joyware ElectronicsLtd (SZSE:300270) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for Joyware ElectronicsLtd

When Might Joyware ElectronicsLtd Run Out Of Money?

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. As at September 2023, Joyware ElectronicsLtd had cash of CN¥121m and no debt. Looking at the last year, the company burnt through CN¥42m. Therefore, from September 2023 it had 2.9 years of cash runway. 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 Joyware ElectronicsLtd's Revenue Growing?

Given that Joyware ElectronicsLtd actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. Pleasingly, the company produced stunning operating revenue growth of 117% over the last year. In reality, this article only makes a short study of the company's growth data. You can take a look at how Joyware ElectronicsLtd is growing revenue over time by checking this visualization of past revenue growth.

How Hard Would It Be For Joyware ElectronicsLtd To Raise More Cash For Growth?

There's no doubt Joyware ElectronicsLtd's revenue growth is impressive but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.

Joyware ElectronicsLtd has a market capitalisation of CN¥1.9b and burnt through CN¥42m last year, which is 2.2% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

So, Should We Worry About Joyware ElectronicsLtd's Cash Burn?

As you can probably tell by now, we're not too worried about Joyware ElectronicsLtd's cash burn. For example, we think its revenue growth suggests that the company is on a good path. But it's fair to say that its cash burn relative to its market cap was also very reassuring. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 1 warning sign for Joyware ElectronicsLtd that potential shareholders should take into account before putting money into a stock.

Of course Joyware ElectronicsLtd 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.