We Think MicroPort CardioFlow Medtech (HKG:2160) Can Afford To Drive Business Growth

Just because a business does not make any money, does not mean that the stock will go down. 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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should MicroPort CardioFlow Medtech (HKG:2160) shareholders 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'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Our analysis indicates that 2160 is potentially overvalued!

When Might MicroPort CardioFlow Medtech Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When MicroPort CardioFlow Medtech last reported its balance sheet in June 2022, it had zero debt and cash worth CN¥2.0b. Importantly, its cash burn was CN¥309m over the trailing twelve months. So it had a cash runway of about 6.3 years from June 2022. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. However, if we extrapolate the company's recent cash burn trend, then it would have a longer cash run way. The image below shows how its cash balance has been changing over the last few years.

How Well Is MicroPort CardioFlow Medtech Growing?

At first glance it's a bit worrying to see that MicroPort CardioFlow Medtech actually boosted its cash burn by 41%, year on year. Having said that, it's revenue is up a very solid 58% in the last year, so there's plenty of reason to believe in the growth story. The company needs to keep up that growth, if it is to really please shareholders. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing 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.

How Easily Can MicroPort CardioFlow Medtech Raise Cash?

While MicroPort CardioFlow Medtech seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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).

MicroPort CardioFlow Medtech has a market capitalisation of CN¥5.5b and burnt through CN¥309m last year, which is 5.7% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

How Risky Is MicroPort CardioFlow Medtech's Cash Burn Situation?

As you can probably tell by now, we're not too worried about MicroPort CardioFlow Medtech's cash burn. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. 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 interesting companies, 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.