We Think Hangzhou SF Intra-city Industrial (HKG:9699) Can Afford To Drive Business Growth

We can readily understand why investors are attracted to unprofitable companies. 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 Hangzhou SF Intra-city Industrial (HKG:9699) 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Hangzhou SF Intra-city Industrial

Does Hangzhou SF Intra-city Industrial Have A Long Cash Runway?

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. As at December 2021, Hangzhou SF Intra-city Industrial had cash of CN¥2.9b and no debt. In the last year, its cash burn was CN¥622m. That means it had a cash runway of about 4.6 years as of 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 Hangzhou SF Intra-city Industrial Growing?

Hangzhou SF Intra-city Industrial reduced its cash burn by 2.7% during the last year, which points to some degree of discipline. And arguably the operating revenue growth of 69% was even more impressive. We think it is growing rather well, upon reflection. 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 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. 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).

Since it has a market capitalisation of CN¥6.2b, Hangzhou SF Intra-city Industrial's CN¥622m in cash burn equates to about 10% of its market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

How Risky Is Hangzhou SF Intra-city Industrial's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Hangzhou SF Intra-city Industrial is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. On this analysis its cash burn reduction was its weakest feature, but we are not concerned about it. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 1 warning sign for Hangzhou SF Intra-city Industrial that potential shareholders should take into account before putting money into a stock.

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.