Companies Like Oxford Nanopore Technologies (LON:ONT) Can Afford To Invest In Growth

Just because a business does not make any money, does not mean that the stock will go down. 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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Oxford Nanopore Technologies (LON:ONT) shareholders is whether they should be concerned by its rate of cash burn. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Oxford Nanopore Technologies

How Long Is Oxford Nanopore Technologies' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2022, Oxford Nanopore Technologies had cash of UK£472m and no debt. In the last year, its cash burn was UK£70m. That means it had a cash runway of about 6.7 years as of June 2022. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Oxford Nanopore Technologies Growing?

On balance, we think it's mildly positive that Oxford Nanopore Technologies trimmed its cash burn by 19% over the last twelve months. And arguably the operating revenue growth of 58% was even more impressive. It seems to be growing nicely. 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 Easily Can Oxford Nanopore Technologies Raise Cash?

We are certainly impressed with the progress Oxford Nanopore Technologies has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. 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 comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Oxford Nanopore Technologies' cash burn of UK£70m is about 3.4% of its UK£2.1b market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

How Risky Is Oxford Nanopore Technologies' Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Oxford Nanopore Technologies is burning through its cash. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. Its weak point is its cash burn reduction, but even that wasn't too bad! After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Taking an in-depth view of risks, we've identified 3 warning signs for Oxford Nanopore Technologies that you should be aware of before investing.

Of course Oxford Nanopore Technologies 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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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.