We Think Lepidico (ASX:LPD) Needs To Drive Business Growth Carefully
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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So, the natural question for Lepidico (ASX:LPD) shareholders is whether they should be concerned by its rate of 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. Let's start with an examination of the business' cash, relative to its cash burn.
View our latest analysis for Lepidico
How Long Is Lepidico's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2022, Lepidico had cash of AU$17m and no debt. Looking at the last year, the company burnt through AU$19m. That means it had a cash runway of around 11 months as of December 2022. 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. Importantly, if we extrapolate recent cash burn trends, the cash runway would be noticeably longer. You can see how its cash balance has changed over time in the image below.
How Is Lepidico's Cash Burn Changing Over Time?
Although Lepidico reported revenue of AU$2.3k last year, it didn't actually have any revenue from operations. To us, that makes it a pre-revenue company, so we'll look to its cash burn trajectory as an assessment of its cash burn situation. In fact, it ramped its spending strongly over the last year, increasing cash burn by 107%. It's fair to say that sort of rate of increase cannot be maintained for very long, without putting pressure on the balance sheet. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Easily Can Lepidico Raise Cash?
Since its cash burn is moving in the wrong direction, Lepidico shareholders may wish to think ahead to when the company may need to raise more cash. 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. 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.
Lepidico has a market capitalisation of AU$76m and burnt through AU$19m last year, which is 24% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.
Is Lepidico's Cash Burn A Worry?
We must admit that we don't think Lepidico is in a very strong position, when it comes to its cash burn. While its cash burn relative to its market cap wasn't too bad, its increasing cash burn does leave us rather nervous. Summing up, we think the Lepidico's cash burn is a risk, based on the factors we mentioned in this article. Taking a deeper dive, we've spotted 5 warning signs for Lepidico you should be aware of, and 2 of them can't be ignored.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, 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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