We Think LungLife AI (LON:LLAI) Needs To Drive Business Growth Carefully

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should LungLife AI (LON:LLAI) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for LungLife AI

When Might LungLife AI 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. When LungLife AI last reported its balance sheet in June 2023, it had zero debt and cash worth US$5.4m. In the last year, its cash burn was US$5.3m. Therefore, from June 2023 it had roughly 12 months of cash runway. Notably, analysts forecast that LungLife AI will break even (at a free cash flow level) in about 4 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. The image below shows how its cash balance has been changing over the last few years.

How Is LungLife AI's Cash Burn Changing Over Time?

In the last year, LungLife AI did book revenue of US$37k, but its revenue from operations was less, at just US$37k. 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. Even though it doesn't get us excited, the 53% reduction in cash burn year on year does suggest the company can continue operating for quite some time. 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 Hard Would It Be For LungLife AI To Raise More Cash For Growth?

There's no doubt LungLife AI's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

LungLife AI's cash burn of US$5.3m is about 21% of its US$26m market capitalisation. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

Is LungLife AI's Cash Burn A Worry?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought LungLife AI's cash burn reduction was relatively promising. One real positive is that analysts are forecasting that the company will reach breakeven. 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, we conducted an in-depth investigation of the company, and identified 4 warning signs for LungLife AI (1 is a bit unpleasant!) that you should be aware of before investing here.

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