U.S. markets closed

We Think IsoRay (NYSEMKT:ISR) Needs To Drive Business Growth Carefully

Simply Wall St

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should IsoRay (NYSEMKT:ISR) shareholders be worried about its cash burn? In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for IsoRay

How Long Is IsoRay's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2019, IsoRay had US$5.3m in cash, and was debt-free. In the last year, its cash burn was US$5.5m. That means it had a cash runway of around 12 months as of June 2019. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. You can see how its cash balance has changed over time in the image below.

AMEX:ISR Historical Debt, November 1st 2019

How Well Is IsoRay Growing?

IsoRay reduced its cash burn by 9.2% during the last year, which is points to some degree of discipline. On top of that, operating revenue was up 23%, making for a heartening combination 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 IsoRay Raise Cash?

While IsoRay 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

IsoRay's cash burn of US$5.5m is about 26% of its US$21m market capitalisation. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

So, Should We Worry About IsoRay's Cash Burn?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought IsoRay's revenue growth was relatively promising. 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. When you don't have traditional metrics like earnings per share and free cash flow to value a company, many are extra motivated to consider qualitative factors such as whether insiders are buying or selling shares. Please Note: IsoRay insiders have been trading shares, according to our data. Click here to check whether insiders have been buying or selling.

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)

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.