Is Prolight Diagnostics (NGM:PRLD) In A Good Position To Invest In Growth?

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. Indeed, Prolight Diagnostics (NGM:PRLD) stock is up 195% in the last year, providing strong gains for shareholders. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given its strong share price performance, we think it's worthwhile for Prolight Diagnostics shareholders to consider whether its cash burn is concerning. 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Prolight Diagnostics

How Long Is Prolight Diagnostics' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2022, Prolight Diagnostics had cash of kr54m and no debt. Importantly, its cash burn was kr36m over the trailing twelve months. Therefore, from December 2022 it had roughly 18 months of cash runway. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. You can see how its cash balance has changed over time in the image below.

How Is Prolight Diagnostics' Cash Burn Changing Over Time?

In our view, Prolight Diagnostics doesn't yet produce significant amounts of operating revenue, since it reported just kr26m in the last twelve months. 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. Its cash burn positively exploded in the last year, up 400%. With that kind of spending growth its cash runway will shorten quickly, as it simultaneously uses its cash while increasing the burn rate. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Prolight Diagnostics is building its business over time.

Can Prolight Diagnostics Raise More Cash Easily?

While Prolight Diagnostics does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. 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 comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Since it has a market capitalisation of kr264m, Prolight Diagnostics' kr36m in cash burn equates to about 14% of its market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

How Risky Is Prolight Diagnostics' Cash Burn Situation?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Prolight Diagnostics' cash burn relative to its market cap was relatively promising. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. Taking a deeper dive, we've spotted 5 warning signs for Prolight Diagnostics you should be aware of, and 3 of them are potentially serious.

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.