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

We can readily understand why investors are attracted to unprofitable companies. 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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for MicroPort CardioFlow Medtech (HKG:2160) shareholders is whether they should be concerned by its rate of 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out 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. When MicroPort CardioFlow Medtech last reported its June 2023 balance sheet in September 2023, it had zero debt and cash worth CN¥1.1b. Importantly, its cash burn was CN¥263m over the trailing twelve months. Therefore, from June 2023 it had 4.1 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. The image below shows how its cash balance has been changing over the last few years.

How Well Is MicroPort CardioFlow Medtech Growing?

On balance, we think it's mildly positive that MicroPort CardioFlow Medtech trimmed its cash burn by 15% over the last twelve months. On top of that, operating revenue was up 26%, making for a heartening combination 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. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can MicroPort CardioFlow Medtech Raise More Cash Easily?

There's no doubt MicroPort CardioFlow Medtech seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

MicroPort CardioFlow Medtech has a market capitalisation of CN¥3.1b and burnt through CN¥263m last year, which is 8.6% 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.

So, Should We Worry About MicroPort CardioFlow Medtech's Cash Burn?

As you can probably tell by now, we're not too worried about MicroPort CardioFlow Medtech's cash burn. For example, we think its cash runway suggests that the company is on a good path. On this analysis its cash burn reduction was its weakest feature, but we are not concerned about it. Shareholders can take heart from the fact that analysts are forecasting it 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. Taking an in-depth view of risks, we've identified 2 warning signs for MicroPort CardioFlow Medtech that you should be aware of before investing.

Of course MicroPort CardioFlow Medtech 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.