We Think Allegra Orthopaedics (ASX:AMT) Can Easily Afford To Drive Business Growth

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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given this risk, we thought we'd take a look at whether Allegra Orthopaedics (ASX:AMT) shareholders should be worried about its 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Allegra Orthopaedics

Does Allegra Orthopaedics Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. Allegra Orthopaedics has such a small amount of debt that we'll set it aside, and focus on the AU$756k in cash it held at June 2020. Importantly, its cash burn was AU$319k over the trailing twelve months. So it had a cash runway of about 2.4 years from June 2020. Arguably, that's a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Allegra Orthopaedics Growing?

Allegra Orthopaedics managed to reduce its cash burn by 71% over the last twelve months, which suggests it's on the right flight path. Pleasingly, this was achieved with the help of a 26% boost to revenue. It seems to be growing nicely. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Allegra Orthopaedics has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For Allegra Orthopaedics To Raise More Cash For Growth?

We are certainly impressed with the progress Allegra Orthopaedics has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Allegra Orthopaedics' cash burn of AU$319k is about 0.8% of its AU$42m 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 Allegra Orthopaedics' Cash Burn Situation?

As you can probably tell by now, we're not too worried about Allegra Orthopaedics' cash burn. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. And even its revenue growth was very encouraging. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash. Separately, we looked at different risks affecting the company and spotted 5 warning signs for Allegra Orthopaedics (of which 1 makes us a bit uncomfortable!) you should know about.

Of course Allegra Orthopaedics 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. 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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