Companies Like HealthBeacon (ISE:HBCN) Are In A Position To Invest In Growth

We can readily understand why investors are attracted to unprofitable companies. 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.

Given this risk, we thought we'd take a look at whether HealthBeacon (ISE:HBCN) shareholders should 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 HealthBeacon

When Might HealthBeacon Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When HealthBeacon last reported its balance sheet in December 2021, it had zero debt and cash worth €27m. Importantly, its cash burn was €6.8m over the trailing twelve months. Therefore, from December 2021 it had 3.9 years of cash runway. There's no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.

How Well Is HealthBeacon Growing?

One thing for shareholders to keep front in mind is that HealthBeacon increased its cash burn by 228% in the last twelve months. While that certainly gives us pause for thought, we take a lot of comfort in the strong annual revenue growth of 84%. 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. This graph of historic revenue growth shows how HealthBeacon is building its business over time.

How Easily Can HealthBeacon Raise Cash?

We are certainly impressed with the progress HealthBeacon 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. 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 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).

Since it has a market capitalisation of €82m, HealthBeacon's €6.8m in cash burn equates to about 8.2% of its market value. 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 HealthBeacon's Cash Burn Situation?

As you can probably tell by now, we're not too worried about HealthBeacon's cash burn. For example, we think its revenue growth suggests that the company is on a good path. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 3 warning signs for HealthBeacon that potential shareholders should take into account before putting money into a stock.

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.