We're Not Worried About SoftOx Solutions's (OB:SOFTOX-ME) Cash Burn

Just because a business does not make any money, does not mean that the stock will go down. For example, SoftOx Solutions (OB:SOFTOX-ME) shareholders have done very well over the last year, with the share price soaring by 292%. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

In light of its strong share price run, we think now is a good time to investigate how risky SoftOx Solutions's cash burn is. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for SoftOx Solutions

When Might SoftOx Solutions Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2019, SoftOx Solutions had cash of kr71m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through kr16m. So it had a cash runway of about 4.4 years from December 2019. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.

How Is SoftOx Solutions's Cash Burn Changing Over Time?

Although SoftOx Solutions reported revenue of kr4.2m 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. Cash burn was pretty flat over the last year, which suggests that management are holding spending steady while the business advances its strategy. SoftOx Solutions makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Hard Would It Be For SoftOx Solutions To Raise More Cash For Growth?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for SoftOx Solutions to raise more cash in the future. 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 to 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.

SoftOx Solutions's cash burn of kr16m is about 2.2% of its kr729m market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

How Risky Is SoftOx Solutions's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way SoftOx Solutions is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. On this analysis its cash burn reduction was its weakest feature, but we are not concerned about it. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. On another note, SoftOx Solutions has 5 warning signs (and 3 which are concerning) we think you should know about.

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. 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. Thank you for reading.