Here's Why We're Not Too Worried About MedAdvisor's (ASX:MDR) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for MedAdvisor (ASX:MDR) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for MedAdvisor

Does MedAdvisor Have A Long Cash Runway?

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. As at June 2020, MedAdvisor had cash of AU$12m and no debt. In the last year, its cash burn was AU$9.0m. That means it had a cash runway of around 16 months as of June 2020. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.

How Well Is MedAdvisor Growing?

Some investors might find it troubling that MedAdvisor is actually increasing its cash burn, which is up 28% in the last year. The revenue growth of 17% gives a ray of hope, at the very least. Considering both these factors, we're not particularly excited by its growth profile. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how MedAdvisor has developed its business over time by checking this visualization of its revenue and earnings history.

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

MedAdvisor seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Companies can raise capital through either debt or equity. 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.

MedAdvisor has a market capitalisation of AU$124m and burnt through AU$9.0m last year, which is 7.2% 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 MedAdvisor's Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought MedAdvisor's cash burn relative to its market cap 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 MedAdvisor's situation. On another note, MedAdvisor has 4 warning signs (and 1 which is a bit concerning) 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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