Will Tianjin Jinran Public Utilities (HKG:1265) Spend Its Cash Wisely?

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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for Tianjin Jinran Public Utilities (HKG:1265) 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for Tianjin Jinran Public Utilities

When Might Tianjin Jinran Public Utilities Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Tianjin Jinran Public Utilities last reported its balance sheet in December 2022, it had zero debt and cash worth CN¥1.1b. Importantly, its cash burn was CN¥90m over the trailing twelve months. So it had a very long cash runway of many years from December 2022. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.

How Well Is Tianjin Jinran Public Utilities Growing?

Notably, Tianjin Jinran Public Utilities actually ramped up its cash burn very hard and fast in the last year, by 190%, signifying heavy investment in the business. That does give us pause, and we can't take much solace in the operating revenue growth of 13% in the same time frame. Considering both these metrics, we're a little concerned about how the company is developing. In reality, this article only makes a short study of the company's growth data. You can take a look at how Tianjin Jinran Public Utilities has developed its business over time by checking this visualization of its revenue and earnings history.

Can Tianjin Jinran Public Utilities Raise More Cash Easily?

Tianjin Jinran Public Utilities seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. 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¥410m, Tianjin Jinran Public Utilities' CN¥90m in cash burn equates to about 22% of its market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

So, Should We Worry About Tianjin Jinran Public Utilities' Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Tianjin Jinran Public Utilities' cash runway was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Tianjin Jinran Public Utilities' situation. On another note, we conducted an in-depth investigation of the company, and identified 2 warning signs for Tianjin Jinran Public Utilities (1 makes us a bit uncomfortable!) 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.