We're Not Very Worried About Zylox-Tonbridge Medical Technology's (HKG:2190) Cash Burn Rate

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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should Zylox-Tonbridge Medical Technology (HKG:2190) shareholders be worried about its 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Zylox-Tonbridge Medical Technology

How Long Is Zylox-Tonbridge Medical Technology's Cash Runway?

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 June 2022, Zylox-Tonbridge Medical Technology had cash of CN¥2.8b and no debt. Importantly, its cash burn was CN¥247m over the trailing twelve months. That means it had a cash runway of very many years as of June 2022. Notably, however, analysts think that Zylox-Tonbridge Medical Technology will break even (at a free cash flow level) 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 Zylox-Tonbridge Medical Technology Growing?

Some investors might find it troubling that Zylox-Tonbridge Medical Technology is actually increasing its cash burn, which is up 49% in the last year. On a more positive note, the operating revenue improved by 167% over the period, offering an indication that the expenditure may well be worthwhile. If that revenue does keep flowing reliably, then the company could see a strong improvement in free cash flow simply by reducing growth expenditure. On balance, we'd say the company is improving over time. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Hard Would It Be For Zylox-Tonbridge Medical Technology To Raise More Cash For Growth?

We are certainly impressed with the progress Zylox-Tonbridge Medical Technology 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. 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.

Zylox-Tonbridge Medical Technology has a market capitalisation of CN¥3.9b and burnt through CN¥247m last year, which is 6.4% 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.

Is Zylox-Tonbridge Medical Technology's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Zylox-Tonbridge Medical Technology'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. 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 1 warning sign for Zylox-Tonbridge Medical Technology that you should be aware of before investing.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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.