Companies Like Omega Diagnostics Group (LON:ODX) Are In A Position To Invest In Growth

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Omega Diagnostics Group (LON:ODX) 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'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Omega Diagnostics Group

When Might Omega Diagnostics Group Run Out Of Money?

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 September 2020, Omega Diagnostics Group had cash of UK£7.0m and no debt. In the last year, its cash burn was UK£3.5m. That means it had a cash runway of about 2.0 years as of September 2020. 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 Well Is Omega Diagnostics Group Growing?

It was quite stunning to see that Omega Diagnostics Group increased its cash burn by 251% over the last year. As if that's not bad enough, the operating revenue also dropped by 5.3%, making us very wary indeed. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Omega Diagnostics Group has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Omega Diagnostics Group Raise Cash?

Since Omega Diagnostics Group can't yet boast improving growth metrics, the market will likely be considering how it can raise more cash if need be. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Omega Diagnostics Group has a market capitalisation of UK£133m and burnt through UK£3.5m last year, which is 2.6% 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 Omega Diagnostics Group's Cash Burn Situation?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Omega Diagnostics Group's cash burn relative to its market cap was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Omega Diagnostics Group's situation. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Omega Diagnostics Group (of which 1 doesn't sit too well with us!) you should know about.

Of course Omega Diagnostics 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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