Companies Like Shanghai Jiaoda Withub Information Industrial (HKG:8205) Are In A Position To Invest In Growth

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for Shanghai Jiaoda Withub Information Industrial (HKG:8205) shareholders is whether they should be concerned by its rate of 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for Shanghai Jiaoda Withub Information Industrial

How Long Is Shanghai Jiaoda Withub Information Industrial's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Shanghai Jiaoda Withub Information Industrial last reported its balance sheet in December 2021, it had zero debt and cash worth CN¥29m. Looking at the last year, the company burnt through CN¥9.0m. So it had a cash runway of about 3.3 years from December 2021. A runway of this length affords the company the time and space it needs to develop the business. You can see how its cash balance has changed over time in the image below.

How Well Is Shanghai Jiaoda Withub Information Industrial Growing?

Shanghai Jiaoda Withub Information Industrial reduced its cash burn by 18% during the last year, which points to some degree of discipline. Revenue also improved during the period, increasing by 12%. 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. This graph of historic earnings and revenue shows how Shanghai Jiaoda Withub Information Industrial is building its business over time.

How Easily Can Shanghai Jiaoda Withub Information Industrial Raise Cash?

There's no doubt Shanghai Jiaoda Withub Information Industrial seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. Companies can raise capital through either debt or equity. 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).

Shanghai Jiaoda Withub Information Industrial has a market capitalisation of CN¥148m and burnt through CN¥9.0m last year, which is 6.1% of the company's market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

Is Shanghai Jiaoda Withub Information Industrial's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Shanghai Jiaoda Withub Information Industrial's cash burn. For example, we think its cash runway suggests that the company is on a good path. Its weak point is its cash burn reduction, but even that wasn't too bad! After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Shanghai Jiaoda Withub Information Industrial (1 can't be ignored!) that you should be aware of before investing here.

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.