Is SoftOx Solutions (OB:SOFTX) In A Good Position To Deliver On Growth Plans?

By
Simply Wall St
Published
August 31, 2021
OB:SOFTX
Source: Shutterstock

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for SoftOx Solutions (OB:SOFTX) 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 SoftOx Solutions

When Might SoftOx Solutions Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at March 2021, SoftOx Solutions had cash of kr55m and no debt. Importantly, its cash burn was kr67m over the trailing twelve months. So it had a cash runway of approximately 10 months from March 2021. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
OB:SOFTX Debt to Equity History September 1st 2021

How Is SoftOx Solutions' Cash Burn Changing Over Time?

Although SoftOx Solutions reported revenue of kr10m last year, it didn't actually have any revenue from operations. That means we consider it a pre-revenue business, and we will focus our growth analysis on cash burn, for now. In fact, it ramped its spending strongly over the last year, increasing cash burn by 130%. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. SoftOx Solutions makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.

Can SoftOx Solutions Raise More Cash Easily?

Given its cash burn trajectory, SoftOx Solutions shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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.

SoftOx Solutions has a market capitalisation of kr435m and burnt through kr67m last year, which is 15% of the company's market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

How Risky Is SoftOx Solutions' Cash Burn Situation?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought SoftOx Solutions' cash burn relative to its market cap was relatively promising. Summing up, we think the SoftOx Solutions' cash burn is a risk, based on the factors we mentioned in this article. Separately, we looked at different risks affecting the company and spotted 5 warning signs for SoftOx Solutions (of which 2 shouldn't be ignored!) you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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