Here's Why We're Not At All Concerned With Hangzhou SF Intra-city Industrial's (HKG:9699) Cash Burn Situation

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Hangzhou SF Intra-city Industrial (HKG:9699) shareholders 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Hangzhou SF Intra-city Industrial

How Long Is Hangzhou SF Intra-city Industrial's Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In June 2023, Hangzhou SF Intra-city Industrial had CN¥2.3b in cash, and was debt-free. Looking at the last year, the company burnt through CN¥221m. So it had a very long cash runway of many years from June 2023. Notably, however, analysts think that Hangzhou SF Intra-city Industrial 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 Well Is Hangzhou SF Intra-city Industrial Growing?

It was fairly positive to see that Hangzhou SF Intra-city Industrial reduced its cash burn by 52% during the last year. On top of that, operating revenue was up 29%, making for a heartening combination It seems to be growing nicely. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Hard Would It Be For Hangzhou SF Intra-city Industrial To Raise More Cash For Growth?

We are certainly impressed with the progress Hangzhou SF Intra-city Industrial 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. Many companies end up issuing new shares to fund future 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).

Hangzhou SF Intra-city Industrial's cash burn of CN¥221m is about 3.5% of its CN¥6.4b market capitalisation. 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 Hangzhou SF Intra-city Industrial's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Hangzhou SF Intra-city Industrial's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. But it's fair to say that its revenue growth was also very reassuring. It's clearly very positive to see that analysts are forecasting the company will break even fairly soon. 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. For us, it's always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the Hangzhou SF Intra-city Industrial CEO receives in total remuneration.

Of course Hangzhou SF Intra-city Industrial 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.