We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for IODM (ASX:IOD) shareholders is whether they should be concerned by its rate of 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). The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
Check out our latest analysis for IODM
When Might IODM Run Out Of Money?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2022, IODM had cash of AU$1.2m and no debt. Looking at the last year, the company burnt through AU$1.8m. That means it had a cash runway of around 8 months as of June 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. The image below shows how its cash balance has been changing over the last few years.
How Is IODM’s Cash Burn Changing Over Time?
In the last year, IODM did book revenue of AU$1.2m, but its revenue from operations was less, at just AU$803k. We don’t think that’s enough operating revenue for us to understand too much from revenue growth rates, since the company is growing off a low base. So we’ll focus on the cash burn, today. Over the last year its cash burn actually increased by 8.9%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company’s true cash runway will therefore be shorter than suggested above, if spending continues to increase. Admittedly, we’re a bit cautious of IODM due to its lack of significant operating revenues. So we’d generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Hard Would It Be For IODM To Raise More Cash For Growth?
While its cash burn is only increasing slightly, IODM shareholders should still consider the potential need for further cash, down the track. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.
IODM has a market capitalisation of AU$189m and burnt through AU$1.8m last year, which is 0.9% of the company’s market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
So, Should We Worry About IODM’s Cash Burn?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought IODM’s cash burn relative to its market cap was relatively promising. Even though we don’t think it has a problem with its cash burn, the analysis we’ve done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. Taking an in-depth view of risks, we’ve identified 3 warning signs for IODM that you should be aware of before investing.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, 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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