Here's Why HealthBeacon (ISE:HBCN) Must Use Its Cash Wisely

We can readily understand why investors are attracted to unprofitable companies. 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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for HealthBeacon (ISE:HBCN) shareholders is whether they should be concerned by its rate of 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). 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 HealthBeacon

How Long Is HealthBeacon's Cash Runway?

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. As at December 2022, HealthBeacon had cash of €12m and no debt. Looking at the last year, the company burnt through €14m. So it had a cash runway of approximately 10 months from December 2022. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.

How Well Is HealthBeacon Growing?

Notably, HealthBeacon actually ramped up its cash burn very hard and fast in the last year, by 133%, signifying heavy investment in the business. On top of that, the fact that operating revenue was basically flat over the same period compounds the concern. Taken together, we think these growth metrics are a little worrying. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how HealthBeacon is building its business over time.

How Hard Would It Be For HealthBeacon To Raise More Cash For Growth?

Given the trajectory of HealthBeacon's cash burn, many investors will already be thinking about how it might 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. Commonly, a business will sell new shares in itself to raise cash and drive 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).

HealthBeacon's cash burn of €14m is about 78% of its €19m market capitalisation. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.

How Risky Is HealthBeacon's Cash Burn Situation?

On this analysis of HealthBeacon's cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap has us a bit worried. After considering the data discussed in this article, we don't have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon. On another note, HealthBeacon has 4 warning signs (and 2 which don't sit too well with us) 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. 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.