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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So, the natural question for MicroPort CardioFlow Medtech (HKG:2160) shareholders is whether they should be concerned by its rate of cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
How Long Is MicroPort CardioFlow Medtech's Cash Runway?
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 MicroPort CardioFlow Medtech last reported its June 2023 balance sheet in September 2023, it had zero debt and cash worth CN¥1.1b. Looking at the last year, the company burnt through CN¥263m. Therefore, from June 2023 it had 4.1 years of cash runway. Importantly, though, analysts think that MicroPort CardioFlow Medtech will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. The image below shows how its cash balance has been changing over the last few years.
How Well Is MicroPort CardioFlow Medtech Growing?
On balance, we think it's mildly positive that MicroPort CardioFlow Medtech trimmed its cash burn by 15% over the last twelve months. And considering that its operating revenue gained 26% during that period, that's great to see. On balance, we'd say the company is improving over time. 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.
Can MicroPort CardioFlow Medtech Raise More Cash Easily?
There's no doubt MicroPort CardioFlow Medtech 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. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.
MicroPort CardioFlow Medtech's cash burn of CN¥263m is about 8.6% of its CN¥3.1b 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 MicroPort CardioFlow Medtech's Cash Burn?
As you can probably tell by now, we're not too worried about MicroPort CardioFlow Medtech's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. On this analysis its cash burn reduction was its weakest feature, but we are not concerned about it. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. 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. An in-depth examination of risks revealed 2 warning signs for MicroPort CardioFlow Medtech that readers should think about before committing capital to this stock.
Of course MicroPort CardioFlow Medtech 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.