Stock Analysis

We're Not Worried About MPH Health Care's (FRA:93M1) Cash Burn

DB:93M1
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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 MPH Health Care (FRA:93M1) shareholders be worried about its 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 MPH Health Care'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 MPH Health Care last reported its balance sheet in December 2021, it had zero debt and cash worth €4.4m. In the last year, its cash burn was €1.1m. That means it had a cash runway of about 4.1 years as of December 2021. Importantly, though, the one analyst we see covering the stock thinks that MPH Health Care will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
DB:93M1 Debt to Equity History June 19th 2022

How Is MPH Health Care's Cash Burn Changing Over Time?

While MPH Health Care did record statutory revenue of €14m over the last year, it didn't have any revenue from operations. That means we consider it a pre-revenue business, and we will focus our growth analysis on cash burn, for now. Notably, its cash burn was actually down by 62% in the last year, which is a real positive in terms of resilience, but uninspiring when it comes to investment for growth. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Hard Would It Be For MPH Health Care To Raise More Cash For Growth?

There's no doubt MPH Health Care's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further 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.

MPH Health Care has a market capitalisation of €76m and burnt through €1.1m last year, which is 1.4% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

How Risky Is MPH Health Care's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way MPH Health Care 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. And even its cash burn reduction was very encouraging. It's clearly very positive to see that at least one analyst is forecasting the company will break even fairly soon. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for MPH Health Care that potential shareholders should take into account before putting money into a stock.

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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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.