We're Not Very Worried About Bioservo Technologies' (STO:BIOS) Cash Burn Rate

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether Bioservo Technologies (STO:BIOS) shareholders should be worried about its cash burn. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Bioservo Technologies

When Might Bioservo Technologies Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Bioservo Technologies last reported its balance sheet in September 2020, it had zero debt and cash worth kr43m. Looking at the last year, the company burnt through kr26m. So it had a cash runway of approximately 20 months from September 2020. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Bioservo Technologies Growing?

At first glance it's a bit worrying to see that Bioservo Technologies actually boosted its cash burn by 18%, year on year. The revenue growth of 17% gives a ray of hope, at the very least. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Bioservo Technologies has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Bioservo Technologies Raise Cash?

While Bioservo Technologies seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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 kr250m, Bioservo Technologies' kr26m in cash burn equates to about 10% of its market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

Is Bioservo Technologies' Cash Burn A Worry?

On this analysis of Bioservo Technologies' cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Bioservo Technologies (of which 1 shouldn't be ignored!) you should know about.

Of course Bioservo Technologies 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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