Companies Like Hua Medicine (Shanghai) (HKG:2552) 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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Hua Medicine (Shanghai) (HKG:2552) shareholders is whether they should be concerned by its rate of 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 Hua Medicine (Shanghai)

When Might Hua Medicine (Shanghai) Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Hua Medicine (Shanghai) last reported its balance sheet in June 2021, it had zero debt and cash worth CN¥847m. Importantly, its cash burn was CN¥43m over the trailing twelve months. So it had a very long cash runway of many years from June 2021. Notably, however, analysts think that Hua Medicine (Shanghai) will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. Depicted below, you can see how its cash holdings have changed over time.

How Is Hua Medicine (Shanghai)'s Cash Burn Changing Over Time?

Although Hua Medicine (Shanghai) reported revenue of CN¥8.8m last year, it didn't actually have any revenue from operations. To us, that makes it a pre-revenue company, so we'll look to its cash burn trajectory as an assessment of its cash burn situation. From a cash flow perspective, it's great to see the company's cash burn dropped by 86% over the last year. That might not be promising when it comes to business development, but it's good for the companies cash preservation. 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 Easily Can Hua Medicine (Shanghai) Raise Cash?

There's no doubt Hua Medicine (Shanghai)'s rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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).

Hua Medicine (Shanghai)'s cash burn of CN¥43m is about 1.1% of its CN¥4.0b 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 Hua Medicine (Shanghai)'s Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Hua Medicine (Shanghai) is burning through its cash. For example, we think its cash burn reduction suggests that the company is on a good path. And even its cash burn relative to its market cap was very encouraging. 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. 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. An in-depth examination of risks revealed 2 warning signs for Hua Medicine (Shanghai) 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 companies insiders are buying, 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.
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