Here's Why We're Not Too Worried About Visiomed Group's (EPA:ALVMG) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. 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.

Given this risk, we thought we'd take a look at whether Visiomed Group (EPA:ALVMG) shareholders should 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'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Visiomed Group

Does Visiomed Group 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. When Visiomed Group last reported its balance sheet in June 2022, it had zero debt and cash worth €2.0m. Importantly, its cash burn was €1.7m over the trailing twelve months. So it had a cash runway of approximately 15 months from June 2022. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.

How Is Visiomed Group's Cash Burn Changing Over Time?

In the last year, Visiomed Group did book revenue of €16m, but its revenue from operations was less, at just €16m. 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. The 83% reduction in its cash burn over the last twelve months may be good for protecting the balance sheet but it hardly points to imminent growth. In reality, this article only makes a short study of the company's growth data. This graph of historic revenue growth shows how Visiomed Group is building its business over time.

Can Visiomed Group Raise More Cash Easily?

While we're comforted by the recent reduction evident from our analysis of Visiomed Group's cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Companies can raise capital through either debt or equity. 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.

Since it has a market capitalisation of €80m, Visiomed Group's €1.7m in cash burn equates to about 2.1% of its market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

Is Visiomed Group's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Visiomed Group is burning through its cash. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. On this analysis its cash runway was its weakest feature, but we are not concerned about it. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. 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 Visiomed Group that investors should know when investing in the stock.

Of course Visiomed Group 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.