We're Interested To See How Ilika (LON:IKA) Uses Its Cash Hoard To Grow

Just because a business does not make any money, does not mean that the stock will go down. Indeed, Ilika (LON:IKA) stock is up 493% in the last year, providing strong gains for shareholders. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given its strong share price performance, we think it's worthwhile for Ilika shareholders to consider whether its cash burn is concerning. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Ilika

When Might Ilika Run Out Of Money?

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. In October 2020, Ilika had UK£12m in cash, and was debt-free. Importantly, its cash burn was UK£3.6m over the trailing twelve months. So it had a cash runway of about 3.5 years from October 2020. Notably, however, the one analyst we see covering the stock thinks that Ilika will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. Depicted below, you can see how its cash holdings have changed over time.

How Is Ilika's Cash Burn Changing Over Time?

In the last year, Ilika did book revenue of UK£2.6m, but its revenue from operations was less, at just UK£237k. 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. As it happens, the company's cash burn reduced by 9.2% over the last year, which suggests that management are maintaining a fairly steady rate of business development, albeit with a slight decrease in spending. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Hard Would It Be For Ilika To Raise More Cash For Growth?

While Ilika is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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 UK£374m, Ilika's UK£3.6m in cash burn equates to about 0.9% of its 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.

So, Should We Worry About Ilika's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Ilika is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. On this analysis its cash burn reduction was its weakest feature, but we are not concerned about it. One real positive is that at least one analyst is forecasting that the company will reach breakeven. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. 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 Ilika that investors should know when investing in the stock.

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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This article by Simply Wall St is general in nature. 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.
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