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. By way of example, Optiscan Imaging (ASX:OIL) has seen its share price rise 357% over the last year, delighting many shareholders. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So notwithstanding the buoyant share price, we think it's well worth asking whether Optiscan Imaging's cash burn is too risky. 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Does Optiscan Imaging Have A Long 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. In December 2020, Optiscan Imaging had AU$9.3m in cash, and was debt-free. In the last year, its cash burn was AU$589k. That means it had a cash runway of very many years as of December 2020. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.
How Is Optiscan Imaging's Cash Burn Changing Over Time?
Although Optiscan Imaging had revenue of AU$2.4m in the last twelve months, its operating revenue was only AU$1.4m in that time period. We don't think that's enough operating revenue for us to understand too much from revenue growth rates, since the company is growing off a low base. So we'll focus on the cash burn, today. The 69% reduction in its cash burn over the last twelve months may be good for protecting the balance sheet but it hardly points to imminent growth. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Optiscan Imaging is growing revenue over time by checking this visualization of past revenue growth.
Can Optiscan Imaging Raise More Cash Easily?
While we're comforted by the recent reduction evident from our analysis of Optiscan Imaging's cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. 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. 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).
Since it has a market capitalisation of AU$129m, Optiscan Imaging's AU$589k in cash burn equates to about 0.5% of its market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.
How Risky Is Optiscan Imaging's Cash Burn Situation?
It may already be apparent to you that we're relatively comfortable with the way Optiscan Imaging is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. But it's fair to say that its cash burn reduction was also very reassuring. 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. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 4 warning signs for Optiscan Imaging that potential shareholders should take into account before putting money into a stock.
Of course Optiscan Imaging 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.
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