MicroPort CardioFlow Medtech (HKG:2160) Is In A Good Position To Deliver On Growth Plans

We can readily understand why investors are attracted to unprofitable companies. 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 should MicroPort CardioFlow Medtech (HKG:2160) 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for MicroPort CardioFlow Medtech

Does MicroPort CardioFlow Medtech Have A Long Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at June 2022, MicroPort CardioFlow Medtech had cash of CN¥2.0b and no debt. Importantly, its cash burn was CN¥309m over the trailing twelve months. Therefore, from June 2022 it had 6.3 years of cash runway. Importantly, though, analysts think that MicroPort CardioFlow Medtech will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. Depicted below, you can see how its cash holdings have changed over time.

How Well Is MicroPort CardioFlow Medtech Growing?

Some investors might find it troubling that MicroPort CardioFlow Medtech is actually increasing its cash burn, which is up 41% in the last year. But looking on the bright side, its revenue gained by 58%, lending some credence to the growth narrative. The company needs to keep up that growth, if it is to really please shareholders. On balance, we'd say the company is improving over time. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

Can MicroPort CardioFlow Medtech Raise More Cash Easily?

We are certainly impressed with the progress MicroPort CardioFlow Medtech has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. 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 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.

Since it has a market capitalisation of CN¥6.5b, MicroPort CardioFlow Medtech's CN¥309m in cash burn equates to about 4.8% of its 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.

Is MicroPort CardioFlow Medtech's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way MicroPort CardioFlow Medtech is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. One real positive is that analysts are forecasting that the company will reach breakeven. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. An in-depth examination of risks revealed 1 warning sign for MicroPort CardioFlow Medtech that readers should think about before committing capital to this 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)

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.