We're Not Very Worried About Chaoda Modern Agriculture (Holdings)'s (HKG:682) Cash Burn Rate

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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 Chaoda Modern Agriculture (Holdings) (HKG:682) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Chaoda Modern Agriculture (Holdings)

Does Chaoda Modern Agriculture (Holdings) Have A Long 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. As at December 2021, Chaoda Modern Agriculture (Holdings) had cash of CN¥101m and no debt. In the last year, its cash burn was CN¥12m. So it had a cash runway of about 8.5 years from December 2021. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. Depicted below, you can see how its cash holdings have changed over time.

Is Chaoda Modern Agriculture (Holdings)'s Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Chaoda Modern Agriculture (Holdings) actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. While it's not that amazing, we still think that the 15% increase in revenue from operations was a positive. 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 Chaoda Modern Agriculture (Holdings) is building its business over time.

How Hard Would It Be For Chaoda Modern Agriculture (Holdings) To Raise More Cash For Growth?

Notwithstanding Chaoda Modern Agriculture (Holdings)'s revenue growth, it is still important to consider how it could raise more money, if it needs to. 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. 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).

Chaoda Modern Agriculture (Holdings) has a market capitalisation of CN¥134m and burnt through CN¥12m last year, which is 8.8% 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.

So, Should We Worry About Chaoda Modern Agriculture (Holdings)'s Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Chaoda Modern Agriculture (Holdings) is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Its revenue growth wasn't quite as good, but was still rather encouraging! After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. 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 Chaoda Modern Agriculture (Holdings) 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 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.