We're Interested To See How Sonovia (TLV:SONO) Uses Its Cash Hoard To Grow

There's no doubt that money can be made by owning shares of unprofitable businesses. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Sonovia (TLV:SONO) shareholders be worried about its cash burn? 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Sonovia

How Long Is Sonovia's Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Sonovia last reported its balance sheet in December 2021, it had zero debt and cash worth US$20m. Importantly, its cash burn was US$1.3m over the trailing twelve months. That means it had a cash runway of very many years as of December 2021. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.

Is Sonovia's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Sonovia actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Notably, its strong revenue growth of 52% over the last year is genuinely cause for optimism. While the past is always worth studying, it is the future that matters most of all. 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 Sonovia Raise Cash?

While Sonovia's revenue growth truly does shine bright, it's important not to ignore the possibility that it might need more cash, at some point, even if only to optimise its growth plans. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Since it has a market capitalisation of US$32m, Sonovia's US$1.3m in cash burn equates to about 3.9% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is Sonovia's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Sonovia is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. And even its cash burn relative to its market cap was very encouraging. 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. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 3 warning signs for Sonovia that investors should know when investing in the stock.

Of course Sonovia 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.