We Think Impact Coatings (STO:IMPC) Needs To Drive Business Growth Carefully

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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for Impact Coatings (STO:IMPC) 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.

See our latest analysis for Impact Coatings

How Long Is Impact Coatings' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2022, Impact Coatings had kr59m in cash, and was debt-free. Looking at the last year, the company burnt through kr68m. That means it had a cash runway of around 10 months as of December 2022. 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. You can see how its cash balance has changed over time in the image below.

How Well Is Impact Coatings Growing?

Notably, Impact Coatings actually ramped up its cash burn very hard and fast in the last year, by 102%, signifying heavy investment in the business. While that's concerning on it's own, the fact that operating revenue was actually down 11% over the same period makes us positively tremulous. Considering both these metrics, we're a little concerned about how the company is developing. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can Impact Coatings Raise More Cash Easily?

Since Impact Coatings can't yet boast improving growth metrics, the market will likely be considering how it can raise more cash if need be. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.

Since it has a market capitalisation of kr302m, Impact Coatings' kr68m in cash burn equates to about 23% of its 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.

So, Should We Worry About Impact Coatings' Cash Burn?

We must admit that we don't think Impact Coatings is in a very strong position, when it comes to its cash burn. While its cash burn relative to its market cap wasn't too bad, its increasing cash burn does leave us rather nervous. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. Taking an in-depth view of risks, we've identified 2 warning signs for Impact Coatings that you should be aware of before investing.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, 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.