Even if a company is losing money, shareholders can make money if they buy a good company at the right price. Biotechnology and mining companies, for example, often lose money for years before they succeed with a new treatment or mineral discovery. Still, only a fool would ignore the risk that a loss-making company will burn through its cash too quickly.

The natural question for Loongson Technology (SHSE:688047) Shareholders should be concerned about cash burn. For this article, we define cash burn as the amount the company spends each year to fund its growth (also known as negative free cash flow). Let’s start by looking at the company’s cash holdings relative to its cash burn.

Check out our latest analysis for Loongson Technology

How long is Loongson Technology’s cash runway?

A cash runway is the amount of time it would take a company to run out of cash if it continued to spend at its current cash burn rate. When Loongson Technology reported its last balance sheet in April 2024 for March 2024, it had no debt and cash worth CN¥1.3b. Over the last year, its cash burn was CN¥363m. So it had a cash runway of about 3.7 years from March 2024. A runway of this length gives the company the time and space it needs to grow the business. Importantly, if we extrapolate recent cash burn trends, the cash runway would be significantly longer. You can see how cash levels have changed over time in the image below.

How well is Loongson technology growing?

Fortunately, Loongson Technology is moving in the right direction when it comes to its cash burn, which is down 56% over the last year. However, it was a little concerning to see operating income fall 25% in that time. Overall, we’d say the company is improving over time. However, the key factor is clearly whether the company will grow its business in the future, so you might want to take a look at how much the company is expected to grow over the next few years.

Can Loongson Technology easily raise more money?

There’s no doubt that Loongson Technology seems to be in a reasonably good position when it comes to managing its cash burn, but even if it’s only hypothetical, it’s always worth asking how easily the company could raise more money to fund its growth. Generally speaking, a publicly traded company can raise new money by issuing shares or taking on debt. One of the main advantages of publicly traded companies is that they can sell shares to investors to raise cash and fund growth. By looking at a company’s cash burn relative to its market capitalization, we can gain insight into how diluted shareholders would be if the company had to raise enough money to cover another year’s cash burn.

Since Loongson Technology’s market capitalization is CNY39 billion, its cash burn of CNY363 million is about 0.9 percent of its market value, so the company could almost certainly just borrow a little money to fund another year’s growth, or it could simply raise the money by issuing some shares.

How risky is Loongson Technology’s cash burn situation?

You may already know that we are relatively comfortable with the way Loongson Technology burns its cash. For example, we believe its cash runway suggests the company is on a good path. While the revenue decline wasn’t great, the other factors mentioned in this article more than make up for the weakness in this metric. When we look at all the metrics in this article together, we are not concerned about the rate of cash burn; the company seems to have a good handle on its medium-term spending needs. Readers need to have a solid understanding of business risks before investing in a stock, and we have found 1 warning signal for Loongson Technology that potential shareholders should consider before investing money in a stock.

If you would rather try another company with better fundamentals, don’t miss this free List of interesting companies with HIGH return on equity and low debt or this list of stocks forecast to grow.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.