Is China Tian Yuan Healthcare Group (HKG:557) In A Good Position To Invest In Growth?

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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for China Tian Yuan Healthcare Group (HKG:557) 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.

Check out our latest analysis for China Tian Yuan Healthcare Group

When Might China Tian Yuan Healthcare Group Run Out Of Money?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at December 2023, China Tian Yuan Healthcare Group had cash of HK$27m and no debt. In the last year, its cash burn was HK$35m. Therefore, from December 2023 it had roughly 9 months of cash runway. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.

How Well Is China Tian Yuan Healthcare Group Growing?

At first glance it's a bit worrying to see that China Tian Yuan Healthcare Group actually boosted its cash burn by 12%, year on year. Also concerning, operating revenue was actually down by 17% in that time. Taken together, we think these growth metrics are a little worrying. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how China Tian Yuan Healthcare Group has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For China Tian Yuan Healthcare Group To Raise More Cash For Growth?

China Tian Yuan Healthcare Group revenue is declining and its cash burn is increasing, so many may be considering its need to raise more cash in the future. 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.

China Tian Yuan Healthcare Group's cash burn of HK$35m is about 16% of its HK$223m market capitalisation. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

So, Should We Worry About China Tian Yuan Healthcare Group's Cash Burn?

On this analysis of China Tian Yuan Healthcare Group's cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway has us a bit worried. Summing up, we think the China Tian Yuan Healthcare Group's cash burn is a risk, based on the factors we mentioned in this article. On another note, China Tian Yuan Healthcare Group has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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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.