We're Not Very Worried About EMvision Medical Devices' (ASX:EMV) Cash Burn Rate

Just because a business does not make any money, does not mean that the stock will go down. Indeed, EMvision Medical Devices (ASX:EMV) stock is up 139% in the last year, providing strong gains for shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So notwithstanding the buoyant share price, we think it's well worth asking whether EMvision Medical Devices' cash burn is too risky. 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for EMvision Medical Devices

How Long Is EMvision Medical Devices' Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When EMvision Medical Devices last reported its balance sheet in December 2020, it had zero debt and cash worth AU$13m. Importantly, its cash burn was AU$2.6m over the trailing twelve months. So it had a cash runway of about 5.1 years from December 2020. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. The image below shows how its cash balance has been changing over the last few years.

How Well Is EMvision Medical Devices Growing?

We reckon the fact that EMvision Medical Devices managed to shrink its cash burn by 20% over the last year is rather encouraging. And operating revenue was up by 12% too. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how EMvision Medical Devices is building its business over time.

How Easily Can EMvision Medical Devices Raise Cash?

While EMvision Medical Devices 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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$210m, EMvision Medical Devices' AU$2.6m in cash burn equates to about 1.2% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

Is EMvision Medical Devices' Cash Burn A Worry?

As you can probably tell by now, we're not too worried about EMvision Medical Devices' cash burn. 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. Taking an in-depth view of risks, we've identified 2 warning signs for EMvision Medical Devices that you should be aware of before investing.

Of course EMvision Medical Devices 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.

If you’re looking to trade EMvision Medical Devices, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.