Stock Analysis

OncoSil Medical (ASX:OSL) Is In A Good Position To Deliver On Growth Plans

ASX:OSL
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We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for OncoSil Medical (ASX:OSL) 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.

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How Long Is OncoSil Medical's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2020, OncoSil Medical had cash of AU$18m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through AU$6.7m. That means it had a cash runway of about 2.7 years as of December 2020. Arguably, that's a prudent and sensible length of runway to have. However, if we extrapolate the company's recent cash burn trend, then it would have a longer cash run way. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
ASX:OSL Debt to Equity History May 13th 2021

How Is OncoSil Medical's Cash Burn Changing Over Time?

In the last year, OncoSil Medical did book revenue of AU$2.2m, but its revenue from operations was less, at just AU$93k. 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. With the cash burn rate up 6.9% 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. 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.

Can OncoSil Medical Raise More Cash Easily?

While its cash burn is only increasing slightly, OncoSil Medical shareholders should still consider the potential need for further cash, down the track. 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$68m, OncoSil Medical's AU$6.7m in cash burn equates to about 9.9% of its 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.

So, Should We Worry About OncoSil Medical's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way OncoSil Medical is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Separately, we looked at different risks affecting the company and spotted 6 warning signs for OncoSil Medical (of which 1 can't be ignored!) 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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