We're Interested To See How Shenyang Public Utility Holdings (HKG:747) Uses Its Cash Hoard To Grow

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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for Shenyang Public Utility Holdings (HKG:747) shareholders is whether they should be concerned by its rate of 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.

View our latest analysis for Shenyang Public Utility Holdings

When Might Shenyang Public Utility Holdings Run Out Of Money?

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. When Shenyang Public Utility Holdings last reported its balance sheet in June 2020, it had zero debt and cash worth CN¥51m. Importantly, its cash burn was CN¥8.9m over the trailing twelve months. Therefore, from June 2020 it had 5.8 years of cash runway. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. Depicted below, you can see how its cash holdings have changed over time.

How Is Shenyang Public Utility Holdings' Cash Burn Changing Over Time?

Whilst it's great to see that Shenyang Public Utility Holdings has already begun generating revenue from operations, last year it only produced CN¥22m, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. From a cash flow perspective, it's great to see the company's cash burn dropped by 96% over the last year. While that hardly points to growth potential, it does at least suggest the company is trying to survive. In reality, this article only makes a short study of the company's growth data. You can take a look at how Shenyang Public Utility Holdings has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Shenyang Public Utility Holdings Raise Cash?

While we're comforted by the recent reduction evident from our analysis of Shenyang Public Utility Holdings' cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive 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. 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).

Shenyang Public Utility Holdings' cash burn of CN¥8.9m is about 6.8% of its CN¥131m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

So, Should We Worry About Shenyang Public Utility Holdings' Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Shenyang Public Utility Holdings is burning through its cash. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. But it's fair to say that its cash burn relative to its market cap was also very reassuring. 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. On another note, Shenyang Public Utility Holdings has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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. 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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