Is Medical Developments International (ASX:MVP) In A Good Position To Invest In Growth?

We can readily understand why investors are attracted to unprofitable companies. 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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for Medical Developments International (ASX:MVP) 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). Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Medical Developments International

How Long Is Medical Developments International's 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. When Medical Developments International last reported its December 2023 balance sheet in February 2024, it had zero debt and cash worth AU$16m. Looking at the last year, the company burnt through AU$21m. Therefore, from December 2023 it had roughly 9 months of cash runway. Notably, one analyst forecasts that Medical Developments International will break even (at a free cash flow level) in about 3 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Medical Developments International Growing?

Some investors might find it troubling that Medical Developments International is actually increasing its cash burn, which is up 7.1% in the last year. The good news is that operating revenue increased by 28% in the last year, indicating that the business is gaining some traction. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Hard Would It Be For Medical Developments International To Raise More Cash For Growth?

Given the trajectory of Medical Developments International's cash burn, many investors will already be thinking about how it might raise more cash in the future. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Since it has a market capitalisation of AU$41m, Medical Developments International's AU$21m in cash burn equates to about 52% of its market value. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).

How Risky Is Medical Developments International's Cash Burn Situation?

On this analysis of Medical Developments International's cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap has us a bit worried. One real positive is that at least one analyst is forecasting that the company will reach breakeven. Summing up, we think the Medical Developments International's cash burn is a risk, based on the factors we mentioned in this article. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 3 warning signs for Medical Developments International that investors should know when investing in the stock.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, 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.