Companies Like Cryofocus Medtech (Shanghai) (HKG:6922) 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. 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 should Cryofocus Medtech (Shanghai) (HKG:6922) 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.

Check out our latest analysis for Cryofocus Medtech (Shanghai)

When Might Cryofocus Medtech (Shanghai) 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. In December 2022, Cryofocus Medtech (Shanghai) had CN¥228m in cash, and was debt-free. Importantly, its cash burn was CN¥104m over the trailing twelve months. That means it had a cash runway of about 2.2 years as of December 2022. Arguably, that's a prudent and sensible length of runway to have. The image below shows how its cash balance has been changing over the last few years.

How Well Is Cryofocus Medtech (Shanghai) Growing?

Some investors might find it troubling that Cryofocus Medtech (Shanghai) is actually increasing its cash burn, which is up 39% in the last year. The silver lining is that revenue was up 21%, showing the business is growing at the top line. On balance, we'd say the company is improving over time. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Cryofocus Medtech (Shanghai) has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For Cryofocus Medtech (Shanghai) To Raise More Cash For Growth?

While Cryofocus Medtech (Shanghai) seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel 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. Many companies end up issuing new shares to fund future 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¥3.5b, Cryofocus Medtech (Shanghai)'s CN¥104m in cash burn equates to about 3.0% of its market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

How Risky Is Cryofocus Medtech (Shanghai)'s Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Cryofocus Medtech (Shanghai) is burning through its cash. In particular, we think its cash burn relative to its market cap 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. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. 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 Cryofocus Medtech (Shanghai) that investors should know when investing in the stock.

Of course Cryofocus Medtech (Shanghai) 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.