We're Interested To See How Atomo Diagnostics (ASX:AT1) Uses Its Cash Hoard To Grow

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.

So, the natural question for Atomo Diagnostics (ASX:AT1) shareholders is whether they should be concerned by its rate of 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 Atomo Diagnostics

How Long Is Atomo Diagnostics' 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. When Atomo Diagnostics last reported its balance sheet in December 2020, it had zero debt and cash worth AU$25m. Importantly, its cash burn was AU$8.2m over the trailing twelve months. So it had a cash runway of about 3.0 years from December 2020. Notably, however, analysts think that Atomo Diagnostics will break even (at a free cash flow level) before then. If that happens, then the length of its cash runway, today, would become a moot point. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Atomo Diagnostics Growing?

Notably, Atomo Diagnostics actually ramped up its cash burn very hard and fast in the last year, by 110%, signifying heavy investment in the business. Given that operating revenue was up a stupendous 538% over the last year, there's a good chance the investment will pay off. On balance, we'd say the company is improving over time. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can Atomo Diagnostics Raise More Cash Easily?

We are certainly impressed with the progress Atomo Diagnostics 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. Commonly, a business will sell new shares in itself to raise cash and drive 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).

Atomo Diagnostics has a market capitalisation of AU$108m and burnt through AU$8.2m last year, which is 7.6% of the company's 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?

As you can probably tell by now, we're not too worried about Atomo Diagnostics' cash burn. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. It's clearly very positive to see that analysts are forecasting the company will break even fairly soon. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. An in-depth examination of risks revealed 2 warning signs for Atomo Diagnostics that readers should think about before committing capital to this stock.

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.
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