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Imagination Park Technologies (CNSX:IP) Will Have To Spend Its Cash Wisely

Simply Wall St

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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should Imagination Park Technologies (CNSX:IP) shareholders be worried about its 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's cash, relative to its cash burn.

See our latest analysis for Imagination Park Technologies

When Might Imagination Park Technologies Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Imagination Park Technologies last reported its balance sheet in May 2019, it had zero debt and cash worth CA$876k. In the last year, its cash burn was CA$2.5m. That means it had a cash runway of around 4 months as of May 2019. That's a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. Depicted below, you can see how its cash holdings have changed over time.

CNSX:IP Historical Debt, September 24th 2019

How Is Imagination Park Technologies's Cash Burn Changing Over Time?

In our view, Imagination Park Technologies doesn't yet produce significant amounts of operating revenue, since it reported just CA$508k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. It's possible that the 15% reduction in cash burn over the last year is evidence of management tightening their belts as cash reserves deplete. Admittedly, we're a bit cautious of Imagination Park Technologies due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

Can Imagination Park Technologies Raise More Cash Easily?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Imagination Park Technologies to raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash to 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 CA$2.8m, Imagination Park Technologies's CA$2.5m in cash burn equates to about 88% of its market value. Given just how high that expenditure is, relative to the company's market value, we think there's an elevated risk of funding distress, and we would be very nervous about holding the stock.

So, Should We Worry About Imagination Park Technologies's Cash Burn?

As you can probably tell by now, we're rather concerned about Imagination Park Technologies's cash burn. Take, for example, its cash burn relative to its market cap, which suggests the company may have difficulty funding itself, in the future. And although we accept its cash burn reduction wasn't as worrying as its cash burn relative to its market cap, it was still a real negative; as indeed were all the factors we considered in this article. The measures we've considered in this article lead us to believe its cash burn is actually quite concerning, and its weak cash position seems likely to cost shareholders one way or another. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that Imagination Park Technologies insiders have been trading shares in the company. Click here to find out if they have been buying or selling.

If you would prefer to check out another company with better fundamentals, then do not miss this freelist of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Thank you for reading.