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. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So should IDEX Biometrics (OB:IDEX) shareholders 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
When Might IDEX Biometrics Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When IDEX Biometrics last reported its balance sheet in September 2019, it had zero debt and cash worth kr97m. Importantly, its cash burn was kr241m over the trailing twelve months. Therefore, from September 2019 it had roughly 5 months of cash runway. Notably, one analyst forecasts that IDEX Biometrics will break even (at a free cash flow level) in about 23 months. Essentially, that means the company will either reduce its cash burn, or else require more cash. You can see how its cash balance has changed over time in the image below.
How Is IDEX Biometrics's Cash Burn Changing Over Time?
Whilst it's great to see that IDEX Biometrics has already begun generating revenue from operations, last year it only produced kr1.3m, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. With the cash burn rate up 6.1% in the last year, it seems that the company is ratcheting up investment in the business over time. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
Can IDEX Biometrics Raise More Cash Easily?
Since its cash burn is increasing (albeit only slightly), IDEX Biometrics shareholders should still be mindful of the possibility it will require more 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 to drive 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.
IDEX Biometrics has a market capitalisation of kr640m and burnt through kr241m last year, which is 38% of the company's market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
How Risky Is IDEX Biometrics's Cash Burn Situation?
We must admit that we don't think IDEX Biometrics is in a very strong position, when it comes to its cash burn. While its increasing cash burn wasn't too bad, its cash runway does leave us rather nervous. One real positive is that at least one analyst is forecasting that the company will reach breakeven. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that IDEX Biometrics insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
Of course IDEX Biometrics 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.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.