Lipidor (STO:LIPI) 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given this risk, we thought we'd take a look at whether Lipidor (STO:LIPI) shareholders should be worried about its cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for Lipidor

When Might Lipidor Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2024, Lipidor had kr23m in cash, and was debt-free. In the last year, its cash burn was kr11m. That means it had a cash runway of about 2.1 years as of June 2024. That's decent, giving the company a couple years to develop its business. Depicted below, you can see how its cash holdings have changed over time.

How Is Lipidor's Cash Burn Changing Over Time?

In our view, Lipidor doesn't yet produce significant amounts of operating revenue, since it reported just kr84k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. The 59% reduction in its cash burn over the last twelve months may be good for protecting the balance sheet but it hardly points to imminent growth. Admittedly, we're a bit cautious of Lipidor due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Hard Would It Be For Lipidor To Raise More Cash For Growth?

While we're comforted by the recent reduction evident from our analysis of Lipidor's cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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).

Since it has a market capitalisation of kr239m, Lipidor's kr11m in cash burn equates to about 4.5% of its market value. 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.

Is Lipidor's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Lipidor's cash burn. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. And even its cash runway was very encouraging. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash. On another note, Lipidor has 5 warning signs (and 3 which are significant) we think you should know about.

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. 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.