We can readily understand why investors are attracted to unprofitable companies. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Intelligent Ultrasound Group (LON:MED) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). Let's start with an examination of the business' cash, relative to its cash burn.
Does Intelligent Ultrasound Group Have A Long Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at June 2020, Intelligent Ultrasound Group had cash of UK£10m and no debt. Importantly, its cash burn was UK£3.9m over the trailing twelve months. Therefore, from June 2020 it had 2.6 years of cash runway. That's decent, giving the company a couple years to develop its business. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Intelligent Ultrasound Group Growing?
At first glance it's a bit worrying to see that Intelligent Ultrasound Group actually boosted its cash burn by 2.5%, year on year. Also concerning, operating revenue was actually down by 11% in that time. In light of the data above, we're fairly sanguine about the business growth trajectory. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Intelligent Ultrasound Group is building its business over time.
How Hard Would It Be For Intelligent Ultrasound Group To Raise More Cash For Growth?
While Intelligent Ultrasound 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. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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 UK£37m, Intelligent Ultrasound Group's UK£3.9m in cash burn equates to about 11% of its market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
So, Should We Worry About Intelligent Ultrasound Group's Cash Burn?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Intelligent Ultrasound Group's cash runway was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Intelligent Ultrasound Group's situation. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Intelligent Ultrasound Group (of which 1 is a bit concerning!) you should know about.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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. 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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