Is Isofol Medical (STO:ISOFOL) In A Good Position To Deliver On Growth Plans?

We can readily understand why investors are attracted to unprofitable companies. By way of example, Isofol Medical (STO:ISOFOL) has seen its share price rise 101% over the last year, delighting many shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

In light of its strong share price run, we think now is a good time to investigate how risky Isofol Medical's cash burn is. 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 Isofol Medical

When Might Isofol Medical Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. Isofol Medical has such a small amount of debt that we'll set it aside, and focus on the kr116m in cash it held at December 2020. Importantly, its cash burn was kr160m over the trailing twelve months. Therefore, from December 2020 it had roughly 9 months of cash runway. Importantly, analysts think that Isofol Medical will reach cashflow breakeven in 2 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. You can see how its cash balance has changed over time in the image below.

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 kr37m in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Over the last year its cash burn actually increased by 8.4%, which suggests that management are increasing investment in future growth, but not too quickly. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. 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.

Can Isofol Medical Raise More Cash Easily?

While its cash burn is only increasing slightly, Isofol Medical shareholders should still consider the potential need for further cash, down the track. Companies can raise capital through either debt or equity. 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 has a market capitalisation of kr972m and burnt through kr160m last year, which is 16% of the company's 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.

So, Should We Worry About Isofol Medical's Cash Burn?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Isofol Medical's cash burn relative to its market cap was relatively promising. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. Taking a deeper dive, we've spotted 4 warning signs for Isofol Medical you should be aware of, and 2 of them are significant.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, 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. 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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