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We Think Hua Medicine (Shanghai) (HKG:2552) Can Afford To Drive Business Growth

Simply Wall St
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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 Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Nevertheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should Hua Medicine (Shanghai) (HKG:2552) shareholders be worried about its cash burn? In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. Let’s start with an examination of the business’ cash, relative to its cash burn.

See our latest analysis for Hua Medicine (Shanghai)

When Might Hua Medicine (Shanghai) Run Out Of Money?

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. In June 2022, Hua Medicine (Shanghai) had CN¥586m in cash, and was debt-free. Looking at the last year, the company burned through CN¥243m. So it had a cash runway of about 2.4 years from June 2022. That’s decent, giving the company a couple years to develop its business. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
SEHK:2552 Debt to Equity History January 6th 2023

How Is Hua Medicine (Shanghai)’s Cash Burn Changing Over Time?

Although Hua Medicine (Shanghai) reported revenue of CN¥23m last year, it didn’t actually have any revenue from operations. To us, that makes it a pre-revenue company, so we’ll look to its cash burn trajectory as an assessment of its cash burn situation. Its cash burn positively exploded in the last year, up 338%. With that kind of spending growth its cash runway will shorten quickly, as it simultaneously uses its cash while increasing the burn rate. While the past is always worth studying, it is the future that matters most of all. 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 Hua Medicine (Shanghai) To Raise More Cash For Growth?

While Hua Medicine (Shanghai) does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. We can compare a company’s cash burn to its market capitalization to get a sense for how many new shares a company would have to issue to fund one year’s operations.

Since it has a market capitalization of CN¥3.5b, Hua Medicine (Shanghai)’s CN¥243m in cash burn equals to about 6.9% of its market value. 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 Hua Medicine (Shanghai)’s Cash Burn?

On this analysis of Hua Medicine (Shanghai)’s cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don’t think they should be worried. Separately, we looked at different risks affecting the company and spotted 2 warning signs for Hua Medicine (Shanghai) (of which 1 can’t be ignored!) you should know about.

Of course Hua Medicine (Shanghai) may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, gold this list of stocks that insiders are buying.

Valuation is complex, but we’re helping make it simple.

Find out whether Hua Medicine (Shanghai) is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.

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