Companies Like Lepidico (ASX:LPD) Are In A Position To Invest In Growth

By
Simply Wall St
Published
May 13, 2022
ASX:LPD
Source: Shutterstock

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. 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. 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, the natural question for Lepidico (ASX:LPD) shareholders is whether they should be concerned by its rate of 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Lepidico

When Might Lepidico Run Out Of Money?

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. When Lepidico last reported its balance sheet in December 2021, it had zero debt and cash worth AU$10m. In the last year, its cash burn was AU$9.0m. So it had a cash runway of approximately 14 months from December 2021. 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.

debt-equity-history-analysis
ASX:LPD Debt to Equity History May 13th 2022

Can Lepidico Raise More Cash Easily?

Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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).

Lepidico's cash burn of AU$9.0m is about 5.5% of its AU$166m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

So, Should We Worry About Lepidico's Cash Burn?

Given it's an early stage company, we don't have a lot of data with which to judge Lepidico's cash burn. However, it is fair to say that its cash burn relative to its market cap gave us comfort. To be frank most cash burning companies are relatively risky, but this one seems safer than most, in our view. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Lepidico (of which 1 makes us a bit uncomfortable!) 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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