We can readily understand why investors are attracted to unprofitable companies. 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 LiDCO Group (LON:LID) 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'.
How Long Is LiDCO Group's Cash Runway?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When LiDCO Group last reported its balance sheet in July 2019, it had zero debt and cash worth UK£1.2m. In the last year, its cash burn was UK£750k. So it had a cash runway of approximately 19 months from July 2019. Importantly, though, analysts think that LiDCO Group will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. The image below shows how its cash balance has been changing over the last few years.
How Well Is LiDCO Group Growing?
Happily, LiDCO Group is travelling in the right direction when it comes to its cash burn, which is down 61% over the last year. Unfortunately, however, operating revenue dropped 9.7% during the same time frame. On balance, we'd say the company is improving over time. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Hard Would It Be For LiDCO Group To Raise More Cash For Growth?
While LiDCO Group seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to 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.
LiDCO Group has a market capitalisation of UK£12m and burnt through UK£750k last year, which is 6.0% of the company's market value. 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.
So, Should We Worry About LiDCO Group's Cash Burn?
As you can probably tell by now, we're not too worried about LiDCO Group's cash burn. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. It's clearly very positive to see that analysts are forecasting the company will break even fairly soon After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that LiDCO Group insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
Of course LiDCO Group 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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.