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. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So, the natural question for Imagion Biosystems (ASX:IBX) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Does Imagion Biosystems 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 2019, Imagion Biosystems had cash of AU$1.1m and no debt. In the last year, its cash burn was AU$6.5m. Therefore, from June 2019 it had roughly 2 months of cash runway. It's extremely surprising to us that the company has allowed its cash runway to get that short! The image below shows how its cash balance has been changing over the last few years.
How Is Imagion Biosystems's Cash Burn Changing Over Time?
Although Imagion Biosystems had revenue of AU$2.5m in the last twelve months, its operating revenue was only AU$2.5m in that time period. Given how low that operating leverage is, we think it's too early to put much weight on the revenue growth, so we'll focus on how the cash burn is changing, instead. As it happens, the company's cash burn reduced by 18% over the last year, which suggests that management may be mindful of the risks of their depleting cash reserves. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Imagion Biosystems is growing revenue over time by checking this visualization of past revenue growth.
How Hard Would It Be For Imagion Biosystems To Raise More Cash For Growth?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Imagion Biosystems to raise more cash in the future. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash to drive growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Since it has a market capitalisation of AU$13m, Imagion Biosystems's AU$6.5m in cash burn equates to about 50% of its market value. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).
Is Imagion Biosystems's Cash Burn A Worry?
There are no prizes for guessing that we think Imagion Biosystems's cash burn is a bit of a worry. In particular, we think its cash runway suggests it isn't in a good position to keep funding growth. While not as bad as its cash runway, its cash burn reduction is also a concern, and considering everything mentioned above, we're struggling to find much to be optimistic about. Looking at the metrics in this article all together, we consider its cash burn situation to be rather dangerous, and likely to cost shareholders one way or the other. 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: Imagion Biosystems insiders have been trading shares, according to our data. Click here to check whether insiders have been buying or selling.
Of course Imagion Biosystems may not be the best stock to buy. So you may wish to see this freecollection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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If you spot an error that warrants correction, please contact the editor at email@example.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.