Is Atomo Diagnostics (ASX:AT1) In A Good Position To Invest In Growth?

Just because a business does not make any money, does not mean that the stock will go down. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given this risk, we thought we'd take a look at whether Atomo Diagnostics (ASX:AT1) 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Atomo Diagnostics

How Long Is Atomo Diagnostics' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2021, Atomo Diagnostics had AU$14m in cash, and was debt-free. Importantly, its cash burn was AU$12m over the trailing twelve months. So it had a cash runway of approximately 14 months from December 2021. Importantly, the one analyst we see covering the stock thinks that Atomo Diagnostics will reach cashflow breakeven in 2 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Atomo Diagnostics Growing?

Some investors might find it troubling that Atomo Diagnostics is actually increasing its cash burn, which is up 42% in the last year. Also concerning, operating revenue was actually down by 17% in that time. Taken together, we think these growth metrics are a little worrying. Clearly, however, the crucial factor is whether the company will grow its business going forward. 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 Atomo Diagnostics To Raise More Cash For Growth?

Since Atomo Diagnostics can't yet boast improving growth metrics, the market will likely be considering how it can raise more cash if need be. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Since it has a market capitalisation of AU$39m, Atomo Diagnostics' AU$12m in cash burn equates to about 29% of its market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

Is Atomo Diagnostics' Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Atomo Diagnostics' cash runway was relatively promising. One real positive is that at least one analyst is forecasting that the company will reach breakeven. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 3 warning signs for Atomo Diagnostics that potential shareholders should take into account before putting money into a stock.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, 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. 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.