Companies Like INOVIQ (ASX:IIQ) Are In A Position To Invest In 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for INOVIQ (ASX:IIQ) shareholders is whether they should be concerned by its rate of cash burn. 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. 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 INOVIQ

How Long Is INOVIQ's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When INOVIQ last reported its balance sheet in December 2022, it had zero debt and cash worth AU$12m. In the last year, its cash burn was AU$6.2m. So it had a cash runway of approximately 23 months from December 2022. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time.

How Is INOVIQ's Cash Burn Changing Over Time?

In our view, INOVIQ doesn't yet produce significant amounts of operating revenue, since it reported just AU$1.7m in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. With the cash burn rate up 5.4% in the last year, it seems that the company is ratcheting up investment in the business over time. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic revenue growth shows how INOVIQ is building its business over time.

How Easily Can INOVIQ Raise Cash?

While its cash burn is only increasing slightly, INOVIQ shareholders should still consider the potential need for further cash, down the track. 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. 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).

INOVIQ's cash burn of AU$6.2m is about 13% of its AU$50m market capitalisation. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

How Risky Is INOVIQ's Cash Burn Situation?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought INOVIQ's cash runway was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about INOVIQ's situation. Separately, we looked at different risks affecting the company and spotted 3 warning signs for INOVIQ (of which 1 is concerning!) you should know about.

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. 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.