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

We can readily understand why investors are attracted to unprofitable companies. 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.

Given this risk, we thought we'd take a look at whether Shanghai HeartCare Medical Technology (HKG:6609) shareholders should be worried about its 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). Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for Shanghai HeartCare Medical Technology

How Long Is Shanghai HeartCare Medical Technology's Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. In December 2021, Shanghai HeartCare Medical Technology had CN¥1.2b in cash, and was debt-free. Importantly, its cash burn was CN¥260m over the trailing twelve months. That means it had a cash runway of about 4.7 years as of 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. In light of the data above, we're fairly sanguine about the business growth trajectory. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

Can Shanghai HeartCare Medical Technology Raise More Cash Easily?

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. 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 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).

Shanghai HeartCare Medical Technology has a market capitalisation of CN¥1.2b and burnt through CN¥260m last year, which is 22% of the company's 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.

Is Shanghai HeartCare Medical Technology's Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Shanghai HeartCare Medical Technology's revenue growth was relatively promising. 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. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Shanghai HeartCare Medical Technology CEO is paid..

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.