Sedana Medical (STO:SEDANA) Is In A Good Position To Deliver On Growth Plans

There's no doubt that money can be made by owning shares of unprofitable businesses. 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 Sedana Medical (STO:SEDANA) 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Sedana Medical

How Long Is Sedana Medical's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In March 2023, Sedana Medical had kr560m in cash, and was debt-free. In the last year, its cash burn was kr240m. That means it had a cash runway of about 2.3 years as of March 2023. Importantly, analysts think that Sedana Medical will reach cashflow breakeven in 3 years. So there's a very good chance it won't need more cash, when you consider the burn rate will be reducing in that period. You can see how its cash balance has changed over time in the image below.

How Well Is Sedana Medical Growing?

At first glance it's a bit worrying to see that Sedana Medical actually boosted its cash burn by 36%, year on year. And we must say we find it concerning that operating revenue dropped 14% over the same period. Considering both these metrics, we're a little concerned about how the company is developing. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

Can Sedana Medical Raise More Cash Easily?

Even though it seems like Sedana Medical is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. 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.

Sedana Medical's cash burn of kr240m is about 9.4% of its kr2.6b market capitalisation. 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 Sedana Medical's Cash Burn Situation?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Sedana Medical's cash runway was relatively promising. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Notably, our data indicates that Sedana Medical insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.

Of course Sedana 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. 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.