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

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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, the natural question for Zylox-Tonbridge Medical Technology (HKG:2190) 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 Zylox-Tonbridge Medical Technology

SWOT Analysis for Zylox-Tonbridge Medical Technology

When Might Zylox-Tonbridge Medical Technology Run Out Of Money?

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 December 2022, Zylox-Tonbridge Medical Technology had cash of CN¥1.9b and no debt. Importantly, its cash burn was CN¥237m over the trailing twelve months. That means it had a cash runway of about 7.9 years as of December 2022. Importantly, though, analysts think that Zylox-Tonbridge Medical Technology will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.

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 15% in the last year. Having said that, it's revenue is up a very solid 88% in the last year, so there's plenty of reason to believe in the growth story. Of course, with spend going up shareholders will want to see fast growth continue. We think it is growing rather well, upon reflection. 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. 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.

Zylox-Tonbridge Medical Technology has a market capitalisation of CN¥3.8b and burnt through CN¥237m last year, which is 6.2% 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 Zylox-Tonbridge Medical Technology's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Zylox-Tonbridge Medical Technology is burning through its cash. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. 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. 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 Zylox-Tonbridge Medical Technology that investors should know when investing in the stock.

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.