Here's Why We're Watching Polarean Imaging's (LON:POLX) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. For example, Polarean Imaging (LON:POLX) shareholders have done very well over the last year, with the share price soaring by 265%. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

In light of its strong share price run, we think now is a good time to investigate how risky Polarean Imaging's cash burn is. 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 Polarean Imaging

How Long Is Polarean Imaging's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Polarean Imaging last reported its balance sheet in December 2020, it had zero debt and cash worth US$6.3m. Importantly, its cash burn was US$5.9m over the trailing twelve months. Therefore, from December 2020 it had roughly 13 months of cash runway. 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. You can see how its cash balance has changed over time in the image below.

How Well Is Polarean Imaging Growing?

Some investors might find it troubling that Polarean Imaging is actually increasing its cash burn, which is up 18% in the last year. It's even more troubling to see that operating revenue fell 54% during the period. Considering both these metrics, we're a little concerned about how the company is developing. 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 Easily Can Polarean Imaging Raise Cash?

Polarean Imaging revenue is declining and its cash burn is increasing, so many may be considering its need to raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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 US$281m, Polarean Imaging's US$5.9m in cash burn equates to about 2.1% 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.

Is Polarean Imaging's Cash Burn A Worry?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Polarean Imaging's cash burn relative to its market cap was relatively promising. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. On another note, Polarean Imaging has 5 warning signs (and 2 which are potentially serious) we think you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, 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. 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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