We can readily understand why investors are attracted to unprofitable companies. Indeed, Irisity (STO:IRIS) stock is up 133% in the last year, providing strong gains for shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
In light of its strong share price run, we think now is a good time to investigate how risky Irisity's cash burn is. 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). Let's start with an examination of the business' cash, relative to its cash burn.
How Long Is Irisity's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2020, Irisity had cash of kr26m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through kr22m. So it had a cash runway of approximately 14 months from September 2020. Notably, however, the one analyst we see covering the stock thinks that Irisity will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.
How Well Is Irisity Growing?
Some investors might find it troubling that Irisity is actually increasing its cash burn, which is up 6.6% in the last year. And we must say we find it concerning that operating revenue dropped 3.5% over the same period. In light of the data above, we're fairly sanguine about the business growth trajectory. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
Can Irisity Raise More Cash Easily?
Irisity 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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 kr517m, Irisity's kr22m in cash burn equates to about 4.3% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
So, Should We Worry About Irisity's Cash Burn?
As you can probably tell by now, we're not too worried about Irisity's cash burn. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. There's no doubt that shareholders can take a lot of heart from the fact that at least one analyst is forecasting it will reach breakeven before too long. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash. Taking an in-depth view of risks, we've identified 2 warning signs for Irisity that you should be aware of before investing.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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