We Think Atomo Diagnostics (ASX:AT1) Can Afford To Drive Business Growth

There's no doubt that money can be made by owning shares of unprofitable businesses. 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. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So, the natural question for Atomo Diagnostics (ASX:AT1) shareholders is whether they should be concerned by its rate of cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called 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

When Might Atomo Diagnostics Run Out Of Money?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Atomo Diagnostics last reported its balance sheet in December 2022, it had zero debt and cash worth AU$10m. Importantly, its cash burn was AU$3.6m over the trailing twelve months. So it had a cash runway of about 2.8 years from December 2022. That's decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.

How Well Is Atomo Diagnostics Growing?

Happily, Atomo Diagnostics is travelling in the right direction when it comes to its cash burn, which is down 69% over the last year. And while hardly exciting, it was still good to see revenue growth of 12% during that time. We think it is growing rather well, upon reflection. In reality, this article only makes a short study of the company's growth data. You can take a look at how Atomo Diagnostics has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For Atomo Diagnostics To Raise More Cash For Growth?

While Atomo Diagnostics seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Since it has a market capitalisation of AU$47m, Atomo Diagnostics' AU$3.6m in cash burn equates to about 7.6% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is Atomo Diagnostics' Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Atomo Diagnostics is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Its weak point is its revenue growth, but even that wasn't too bad! 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, Atomo Diagnostics has 3 warning signs (and 2 which make us uncomfortable) we think you should know about.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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.