Here's Why We're Not Too Worried About HealthSpace Data Systems' (CSE:HS) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should HealthSpace Data Systems (CSE:HS) 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 our latest analysis for HealthSpace Data Systems

How Long Is HealthSpace Data Systems' Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at December 2020, HealthSpace Data Systems had cash of US$4.4m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was US$2.7m. That means it had a cash runway of around 19 months as of December 2020. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. The image below shows how its cash balance has been changing over the last few years.

How Well Is HealthSpace Data Systems Growing?

It was quite stunning to see that HealthSpace Data Systems increased its cash burn by 271% over the last year. While that isa little concerning at a glance, the company has a track record of recent growth, evidenced by the impressive 55% growth in revenue, over the very same year. In light of the data above, we're fairly sanguine about the business growth trajectory. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic revenue growth shows how HealthSpace Data Systems is building its business over time.

How Easily Can HealthSpace Data Systems Raise Cash?

Even though it seems like HealthSpace Data Systems is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

HealthSpace Data Systems has a market capitalisation of US$43m and burnt through US$2.7m last year, which is 6.4% of the company's 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 HealthSpace Data Systems' Cash Burn?

On this analysis of HealthSpace Data Systems' cash burn, we think its revenue growth was reassuring, while its increasing cash burn has us a bit worried. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. On another note, HealthSpace Data Systems has 4 warning signs (and 2 which are a bit unpleasant) we think 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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