We Think Perimeter Medical Imaging AI (CVE:PINK) Needs To Drive Business Growth Carefully

Just because a business does not make any money, does not mean that the stock will go down. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should Perimeter Medical Imaging AI (CVE:PINK) shareholders be worried about its cash burn? In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out the opportunities and risks within the CA Medical Equipment industry.

Does Perimeter Medical Imaging AI 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 2022, Perimeter Medical Imaging AI had cash of CA$45m and such minimal debt that we can ignore it for the purposes of this analysis. Importantly, its cash burn was CA$21m over the trailing twelve months. That means it had a cash runway of about 2.1 years as of June 2022. Notably, analysts forecast that Perimeter Medical Imaging AI will break even (at a free cash flow level) in about 4 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. The image below shows how its cash balance has been changing over the last few years.

How Is Perimeter Medical Imaging AI's Cash Burn Changing Over Time?

In the last year, Perimeter Medical Imaging AI did book revenue of CA$121k, but its revenue from operations was less, at just CA$31k. Given how low that operating leverage is, we think it's too early to put much weight on the revenue growth, so we'll focus on how the cash burn is changing, instead. Over the last year its cash burn actually increased by a very significant 54%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. 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 Easily Can Perimeter Medical Imaging AI Raise Cash?

While Perimeter Medical Imaging AI does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. 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.

Perimeter Medical Imaging AI has a market capitalisation of CA$86m and burnt through CA$21m last year, which is 25% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

Is Perimeter Medical Imaging AI's Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Perimeter Medical Imaging AI's cash runway was relatively promising. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. 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 Perimeter Medical Imaging AI's situation. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Perimeter Medical Imaging AI (1 can't be ignored!) that you should be aware of before investing here.

Of course Perimeter Medical Imaging AI 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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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.