Companies Like Psomagen (KOSDAQ:950200) Are In A Position 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 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 Psomagen (KOSDAQ:950200) 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). 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 Psomagen

Does Psomagen Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. Psomagen has such a small amount of debt that we'll set it aside, and focus on the ₩12b in cash it held at March 2024. Importantly, its cash burn was ₩4.7b over the trailing twelve months. So it had a cash runway of about 2.5 years from March 2024. That's decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.

How Well Is Psomagen Growing?

At first glance it's a bit worrying to see that Psomagen actually boosted its cash burn by 42%, year on year. And we must say we find it concerning that operating revenue dropped 17% over the same period. Taken together, we think these growth metrics are a little worrying. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Psomagen has developed its business over time by checking this visualization of its revenue and earnings history.

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

Psomagen seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Companies can raise capital through either debt or equity. 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 ₩89b, Psomagen's ₩4.7b in cash burn equates to about 5.3% 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.

So, Should We Worry About Psomagen's Cash Burn?

On this analysis of Psomagen's cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Psomagen (of which 1 doesn't sit too well with us!) 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 with significant insider holdings, 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.