We Think InDex Pharmaceuticals Holding (STO:INDEX) Can Afford To Drive Business Growth

Just because a business does not make any money, does not mean that the stock will go down. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So, the natural question for InDex Pharmaceuticals Holding (STO:INDEX) shareholders is whether they should be concerned by its rate of 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for InDex Pharmaceuticals Holding

Does InDex Pharmaceuticals Holding Have A Long 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. In September 2022, InDex Pharmaceuticals Holding had kr398m in cash, and was debt-free. In the last year, its cash burn was kr139m. So it had a cash runway of about 2.9 years from September 2022. That's decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.

How Is InDex Pharmaceuticals Holding's Cash Burn Changing Over Time?

Although InDex Pharmaceuticals Holding reported revenue of kr64m last year, it didn't actually have any revenue from operations. To us, that makes it a pre-revenue company, so we'll look to its cash burn trajectory as an assessment of its cash burn situation. Over the last year its cash burn actually increased by a very significant 59%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. 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.

How Hard Would It Be For InDex Pharmaceuticals Holding To Raise More Cash For Growth?

While InDex Pharmaceuticals Holding 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. Many companies end up issuing new shares to fund future 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).

InDex Pharmaceuticals Holding's cash burn of kr139m is about 35% of its kr399m market capitalisation. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

How Risky Is InDex Pharmaceuticals Holding's Cash Burn Situation?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought InDex Pharmaceuticals Holding's cash runway was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about InDex Pharmaceuticals Holding's situation. Separately, we looked at different risks affecting the company and spotted 3 warning signs for InDex Pharmaceuticals Holding (of which 1 doesn't sit too well with us!) you should know about.

Of course InDex Pharmaceuticals Holding 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.