Just because a business does not make any money, does not mean that the stock will go down. 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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for Osprey Medical (ASX:OSP) 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Does Osprey Medical Have A Long Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at June 2019, Osprey Medical had cash of US$16m and no debt. In the last year, its cash burn was US$17m. Therefore, from June 2019 it had roughly 11 months of cash runway. 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. The image below shows how its cash balance has been changing over the last few years.
How Well Is Osprey Medical Growing?
Some investors might find it troubling that Osprey Medical is actually increasing its cash burn, which is up 6.7% in the last year. The good news is that operating revenue increased by 49% in the last year, indicating that the business is gaining some traction. It seems to be growing nicely. 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.
Can Osprey Medical Raise More Cash Easily?
While Osprey Medical 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.
Osprey Medical has a market capitalisation of AU$21m and burnt through US$17m last year, which is 121% of the company's market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.
How Risky Is Osprey Medical's Cash Burn Situation?
On this analysis of Osprey Medical's cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap has us a bit worried. Summing up, we think the Osprey Medical's cash burn is a risk, based on the factors we mentioned in this article. 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: Osprey Medical insiders have been trading shares, according to our data. Click here to check whether insiders have been buying or selling.
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.
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