Here's Why We're Watching Micropos Medical's (NGM:MPOS) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. For example, Micropos Medical (NGM:MPOS) shareholders have done very well over the last year, with the share price soaring by 155%. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

In light of its strong share price run, we think now is a good time to investigate how risky Micropos Medical's cash burn is. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Micropos Medical

How Long Is Micropos Medical's Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Micropos Medical last reported its balance sheet in March 2021, it had zero debt and cash worth kr6.3m. In the last year, its cash burn was kr12m. That means it had a cash runway of around 6 months as of 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. You can see how its cash balance has changed over time in the image below.

How Is Micropos Medical's Cash Burn Changing Over Time?

Whilst it's great to see that Micropos Medical has already begun generating revenue from operations, last year it only produced kr6.5m, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Given the length of the cash runway, we'd interpret the 33% reduction in cash burn, in twelve months, as prudent if not necessary for capital preservation. Admittedly, we're a bit cautious of Micropos Medical due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

Can Micropos Medical Raise More Cash Easily?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Micropos Medical to raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and 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.

Since it has a market capitalisation of kr304m, Micropos Medical's kr12m in cash burn equates to about 3.9% 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.

How Risky Is Micropos Medical's Cash Burn Situation?

On this analysis of Micropos Medical's cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway has us a bit worried. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. On another note, Micropos Medical has 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

Of course Micropos Medical 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.

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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. 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.
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