Is XIIlabLtd (KOSDAQ:189330) In A Good 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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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 XIIlabLtd (KOSDAQ:189330) 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for XIIlabLtd

How Long Is XIIlabLtd'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. When XIIlabLtd last reported its March 2024 balance sheet in May 2024, it had zero debt and cash worth ₩12b. In the last year, its cash burn was ₩5.6b. That means it had a cash runway of about 2.2 years as of 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 XIIlabLtd Growing?

XIIlabLtd boosted investment sharply in the last year, with cash burn ramping by 62%. While that's concerning on it's own, the fact that operating revenue was actually down 40% over the same period makes us positively tremulous. Considering both these metrics, we're a little concerned about how the company is developing. In reality, this article only makes a short study of the company's growth data. You can take a look at how XIIlabLtd has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can XIIlabLtd Raise Cash?

While XIIlabLtd seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.

XIIlabLtd's cash burn of ₩5.6b is about 11% of its ₩52b market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

How Risky Is XIIlabLtd's Cash Burn Situation?

On this analysis of XIIlabLtd's cash burn, we think its cash runway was reassuring, while its falling revenue has us a bit worried. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for XIIlabLtd (1 is a bit unpleasant!) that you should be aware of before investing here.

Of course XIIlabLtd 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.

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

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