We are confident that Shanghai Anlogic Infotech (SHSE:688107) will put its cash to good use

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.

This should also Shanghai Anlogic Infotech (SHSE:688107) Shareholders concerned about cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends money to fund its growth; its negative free cash flow. Let’s start by looking at the company’s cash relative to its cash burn.

Check out our latest analysis for Shanghai Anlogic Infotech

When might Shanghai Anlogic Infotech run out of money?

A company’s cash runway is calculated by dividing its cash balance by its cash burn. As of March 2024, Shanghai Anlogic Infotech had CN¥569m in cash and was debt-free. Over the last year, the company burned through CN¥82m. So as of March 2024, it had 6.9 years of cash runway. Even though this is only one measure of the company’s cash burn, the thought of such a long cash runway warms our stomachs in a reassuring way. The image below shows how cash balance has changed over the past few years.

How well is Shanghai Anlogic Infotech growing?

Fortunately, Shanghai Anlogic Infotech is moving in the right direction when it comes to its cash burn, which is down 81% over the last year. Unfortunately, however, operating income fell 32% over the same period. Taking the above factors into account, the company doesn’t fare too badly when assessing its changes 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.

How difficult would it be for Shanghai Anlogic Infotech to raise more money for growth?

There’s no doubt that Shanghai Anlogic Infotech seems to be in a reasonably good position when it comes to managing its cash burn. But even if it’s hypothetical, it’s always worth asking how easily the company could raise more money to fund its growth. Companies can raise capital either through debt or equity. One of the main advantages of publicly traded companies is that they can sell shares to investors to raise money and fund growth. We can compare a company’s cash burn with its market capitalization to get a sense of how many new shares a company would need to issue to fund a year’s operations.

Shanghai Anlogic Infotech has a market capitalization of 8.3 billion Chinese yen and has burned through 82 million Chinese yen in the last year, representing 1.0 percent of the company’s market value, so it could almost certainly just borrow a little money to fund another year’s growth, or it could raise the money quite simply by issuing some shares.

Is Shanghai Anlogic Infotech’s cash usage a cause for concern?

You may already know that we are relatively comfortable with the way Shanghai Anlogic Infotech is burning its cash. For example, we believe its cash reserves suggest the company is on the right track. Although the declining revenue gives us cause for concern, the other metrics discussed in this article paint a positive picture overall. When we look at all the metrics discussed in this article together, we are not concerned about the rate of cash burn; the company seems to have its medium-term spending needs well under control. A thorough review of the risks revealed 1 warning signal for Shanghai Anlogic Infotech what readers should think about before investing capital in this stock.

Naturally Shanghai Anlogic Infotech may not be the best stock to buy. You may want to see this free Collection of companies with high return on equity or this list of stocks with high insider ownership.

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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.