We Think Epitomee Medical (TLV:EPIT) Can Afford To Drive Business Growth

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 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 Epitomee Medical (TLV:EPIT) shareholders should be worried about its 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. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Epitomee Medical

When Might Epitomee Medical Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Epitomee Medical last reported its December 2023 balance sheet in March 2024, it had zero debt and cash worth US$35m. Importantly, its cash burn was US$12m over the trailing twelve months. So it had a cash runway of about 2.9 years from December 2023. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.

How Is Epitomee Medical's Cash Burn Changing Over Time?

In our view, Epitomee Medical doesn't yet produce significant amounts of operating revenue, since it reported just US$10m in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. With cash burn dropping by 8.6% it seems management feel the company is spending enough to advance its business plans at an appropriate pace. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Epitomee Medical has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Epitomee Medical Raise Cash?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Epitomee Medical to raise more cash in the future. 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. 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.

Since it has a market capitalisation of US$28m, Epitomee Medical's US$12m in cash burn equates to about 43% of its market value. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).

So, Should We Worry About Epitomee Medical's Cash Burn?

On this analysis of Epitomee Medical's cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Epitomee Medical's situation. On another note, Epitomee Medical has 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

Of course Epitomee Medical 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 with high insider ownership.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com