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

By
Simply Wall St
Published
January 07, 2022
ASX:EMV
Source: Shutterstock

Just because a business does not make any money, does not mean that the stock will go down. 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 should EMvision Medical Devices (ASX:EMV) shareholders be worried about its 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). Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for EMvision Medical Devices

When Might EMvision Medical Devices Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When EMvision Medical Devices last reported its balance sheet in June 2021, it had zero debt and cash worth AU$9.7m. Importantly, its cash burn was AU$4.6m over the trailing twelve months. So it had a cash runway of about 2.1 years from June 2021. Arguably, that's a prudent and sensible length of runway to have. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
ASX:EMV Debt to Equity History January 7th 2022

How Well Is EMvision Medical Devices Growing?

Some investors might find it troubling that EMvision Medical Devices is actually increasing its cash burn, which is up 42% in the last year. At least the revenue was up 10% during the period, even if it wasn't up by much. In light of the data above, we're fairly sanguine about the business growth trajectory. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how EMvision Medical Devices has developed its business over time by checking this visualization of its revenue and earnings history.

Can EMvision Medical Devices Raise More Cash Easily?

While EMvision Medical Devices seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

EMvision Medical Devices has a market capitalisation of AU$186m and burnt through AU$4.6m last year, which is 2.5% of the company's 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.

How Risky Is EMvision Medical Devices' Cash Burn Situation?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought EMvision Medical Devices' cash burn relative to its market cap was relatively promising. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Taking a deeper dive, we've spotted 4 warning signs for EMvision Medical Devices you should be aware of, and 1 of them is concerning.

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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