There's no doubt that money can be made by owning shares of unprofitable businesses. 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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for Isofol Medical (STO:ISOFOL) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
How Long Is Isofol 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. In June 2021, Isofol Medical had kr531m in cash, and was debt-free. Importantly, its cash burn was kr148m over the trailing twelve months. That means it had a cash runway of about 3.6 years as of June 2021. Importantly, though, analysts think that Isofol Medical will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. The image below shows how its cash balance has been changing over the last few years.
How Is Isofol Medical's Cash Burn Changing Over Time?
In our view, Isofol Medical doesn't yet produce significant amounts of operating revenue, since it reported just kr50m 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. As it happens, the company's cash burn reduced by 19% over the last year, which suggests that management are maintaining a fairly steady rate of business development, albeit with a slight decrease in spending. 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 Easily Can Isofol Medical Raise Cash?
While Isofol Medical is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster 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.
Isofol Medical's cash burn of kr148m is about 10.0% of its kr1.5b market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
Is Isofol Medical's Cash Burn A Worry?
It may already be apparent to you that we're relatively comfortable with the way Isofol Medical is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Its weak point is its cash burn reduction, but even that wasn't too bad! Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. On another note, we conducted an in-depth investigation of the company, and identified 2 warning signs for Isofol Medical (1 doesn't sit too well with us!) that you should be aware of before investing here.
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)
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.
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