Companies Like Venus Medtech (Hangzhou) (HKG:2500) Can Afford To Invest In Growth

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

Given this risk, we thought we'd take a look at whether Venus Medtech (Hangzhou) (HKG:2500) shareholders should 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'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Venus Medtech (Hangzhou)

How Long Is Venus Medtech (Hangzhou)'s Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2020, Venus Medtech (Hangzhou) had cash of CN¥2.7b and no debt. In the last year, its cash burn was CN¥361m. So it had a cash runway of about 7.5 years from December 2020. Importantly, though, analysts think that Venus Medtech (Hangzhou) will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. The image below shows how its cash balance has been changing over the last few years.

How Well Is Venus Medtech (Hangzhou) Growing?

At first glance it's a bit worrying to see that Venus Medtech (Hangzhou) actually boosted its cash burn by 10%, year on year. At least the revenue was up 18% during the period, even if it wasn't up by much. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing 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.

Can Venus Medtech (Hangzhou) Raise More Cash Easily?

There's no doubt Venus Medtech (Hangzhou) 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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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).

Venus Medtech (Hangzhou)'s cash burn of CN¥361m is about 1.4% of its CN¥26b market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

Is Venus Medtech (Hangzhou)'s Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Venus Medtech (Hangzhou) is burning through its cash. For example, we think its cash runway 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. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 3 warning signs for Venus Medtech (Hangzhou) that investors should know when investing in the stock.

Of course Venus Medtech (Hangzhou) 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. 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.
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