There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for ImpediMed (ASX:IPD) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.
When Might ImpediMed Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2022, ImpediMed had AU$41m in cash, and was debt-free. Importantly, its cash burn was AU$21m over the trailing twelve months. So it had a cash runway of approximately 23 months from June 2022. Notably, analysts forecast that ImpediMed will break even (at a free cash flow level) in about 3 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. Depicted below, you can see how its cash holdings have changed over time.
How Well Is ImpediMed Growing?
Some investors might find it troubling that ImpediMed is actually increasing its cash burn, which is up 33% in the last year. The silver lining is that revenue was up 26%, showing the business is growing at the top line. On balance, we'd say the company is improving over time. 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.
How Easily Can ImpediMed Raise Cash?
ImpediMed seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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).
ImpediMed has a market capitalisation of AU$105m and burnt through AU$21m last year, which is 20% 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.
How Risky Is ImpediMed's Cash Burn Situation?
On this analysis of ImpediMed's cash burn, we think its revenue growth was reassuring, while its increasing cash burn has us a bit worried. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Taking an in-depth view of risks, we've identified 1 warning sign for ImpediMed that you should be aware of before investing.
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.
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