Here's Why We're Not At All Concerned With Venus Medtech (Hangzhou)'s (HKG:2500) Cash Burn Situation

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. 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.

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 article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Venus Medtech (Hangzhou)

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

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In June 2021, Venus Medtech (Hangzhou) had CN¥3.6b in cash, and was debt-free. Looking at the last year, the company burnt through CN¥452m. Therefore, from June 2021 it had 7.9 years of cash runway. Notably, however, analysts think that Venus Medtech (Hangzhou) will break even (at a free cash flow level) 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 Venus Medtech (Hangzhou) Growing?

Some investors might find it troubling that Venus Medtech (Hangzhou) is actually increasing its cash burn, which is up 48% in the last year. Having said that, it's revenue is up a very solid 81% 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. 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 Hard Would It Be For Venus Medtech (Hangzhou) To Raise More Cash For Growth?

We are certainly impressed with the progress Venus Medtech (Hangzhou) 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. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Since it has a market capitalisation of CN¥12b, Venus Medtech (Hangzhou)'s CN¥452m in cash burn equates to about 3.7% of its 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.

How Risky Is Venus Medtech (Hangzhou)'s Cash Burn Situation?

As you can probably tell by now, we're not too worried about Venus Medtech (Hangzhou)'s cash burn. For example, we think its revenue growth 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. It's clearly very positive to see that analysts are forecasting the company will break even fairly soon. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 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. 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.