Companies Like Shanghai HeartCare Medical Technology (HKG:6609) Are In A Position To Invest In Growth

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Shanghai HeartCare Medical Technology (HKG:6609) shareholders 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'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Shanghai HeartCare Medical Technology

How Long Is Shanghai HeartCare Medical Technology'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. When Shanghai HeartCare Medical Technology last reported its balance sheet in December 2021, it had zero debt and cash worth CN¥1.2b. Looking at the last year, the company burnt through CN¥260m. So it had a cash runway of about 4.7 years from December 2021. There's no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.

How Well Is Shanghai HeartCare Medical Technology Growing?

Notably, Shanghai HeartCare Medical Technology actually ramped up its cash burn very hard and fast in the last year, by 188%, signifying heavy investment in the business. But shareholders are no doubt taking some confidence from the rockstar revenue growth of 519% during that same year. Considering both these factors, we're not particularly excited by its growth profile. 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 Easily Can Shanghai HeartCare Medical Technology Raise Cash?

We are certainly impressed with the progress Shanghai HeartCare 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. 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).

Since it has a market capitalisation of CN¥933m, Shanghai HeartCare Medical Technology's CN¥260m in cash burn equates to about 28% of its market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

How Risky Is Shanghai HeartCare Medical Technology's Cash Burn Situation?

On this analysis of Shanghai HeartCare Medical Technology's cash burn, we think its revenue growth was reassuring, while its increasing cash burn has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Shanghai HeartCare Medical Technology's situation. An in-depth examination of risks revealed 1 warning sign for Shanghai HeartCare Medical Technology that readers should think about before committing capital to this stock.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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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.