We're Not Very Worried About Intelligent Ultrasound Group's (LON:MED) Cash Burn Rate

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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Intelligent Ultrasound Group (LON:MED) shareholders is whether they should be concerned by its rate of cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. 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 Intelligent Ultrasound Group

How Long Is Intelligent Ultrasound Group's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Intelligent Ultrasound Group last reported its balance sheet in June 2020, it had zero debt and cash worth UK£10m. Looking at the last year, the company burnt through UK£3.9m. So it had a cash runway of about 2.6 years from June 2020. That's decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.

How Well Is Intelligent Ultrasound Group Growing?

At first glance it's a bit worrying to see that Intelligent Ultrasound Group actually boosted its cash burn by 2.5%, year on year. Also concerning, operating revenue was actually down by 11% in that time. Considering both these factors, we're not particularly excited by its growth profile. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Intelligent Ultrasound Group has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For Intelligent Ultrasound Group To Raise More Cash For Growth?

Intelligent Ultrasound Group seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. 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£41m, Intelligent Ultrasound Group's UK£3.9m in cash burn equates to about 9.6% of its 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.

How Risky Is Intelligent Ultrasound Group's Cash Burn Situation?

On this analysis of Intelligent Ultrasound Group's cash burn, we think its cash runway was reassuring, while its falling revenue has us a bit worried. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. On another note, Intelligent Ultrasound Group has 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

Of course Intelligent Ultrasound 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.

If you’re looking to trade Intelligent Ultrasound Group, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.