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 ScandiDos (STO:SDOS) 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Does ScandiDos Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. ScandiDos has such a small amount of debt that we'll set it aside, and focus on the kr12m in cash it held at October 2019. Looking at the last year, the company burnt through kr15m. Therefore, from October 2019 it had roughly 9 months of cash runway. Notably, however, the one analyst we see covering the stock thinks that ScandiDos will break even (at a free cash flow level) before then. If that happens, then the length of its cash runway, today, would become a moot point. You can see how its cash balance has changed over time in the image below.
How Well Is ScandiDos Growing?
ScandiDos reduced its cash burn by 12% during the last year, which points to some degree of discipline. And considering that its operating revenue gained 26% during that period, that's great to see. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
Can ScandiDos Raise More Cash Easily?
ScandiDos seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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).
ScandiDos has a market capitalisation of kr163m and burnt through kr15m last year, which is 9.3% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
So, Should We Worry About ScandiDos's Cash Burn?
It may already be apparent to you that we're relatively comfortable with the way ScandiDos is burning through its cash. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. Although its cash runway does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. It's clearly very positive to see that at least one analyst is forecasting the company will break even fairly soon. Looking at all the measures in this article, together, we're not worried about its rate of cash burn, which seems to be under control. For us, it's always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the ScandiDos CEO receives in total remuneration.
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)
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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