Yahoo Finance Companies Like ImpediMed (ASX:IPD) Can Be Considered Quite Risky
Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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 ImpediMed (ASX:IPD) shareholders be worried about its 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.
See our latest analysis for ImpediMed
When Might ImpediMed Run Out Of Money?
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. When ImpediMed last reported its balance sheet in December 2019, it had zero debt and cash worth AU$13m. In the last year, its cash burn was AU$22m. That means it had a cash runway of around 7 months as of December 2019. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.
How Well Is ImpediMed Growing?
On balance, we think it's mildly positive that ImpediMed trimmed its cash burn by 4.1% over the last twelve months. On top of that, operating revenue was up 45%, making for a heartening combination It seems to be growing nicely. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
Can ImpediMed Raise More Cash Easily?
Since ImpediMed revenue has been falling, the market will likely be considering how it can raise more cash if need be. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash to drive 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.
ImpediMed's cash burn of AU$22m is about 73% of its AU$31m market capitalisation. Given how large that cash burn is, relative to the market value of the entire company, we'd consider it to be a high risk stock, with the real possibility of extreme dilution.
Is ImpediMed's Cash Burn A Worry?
On this analysis of ImpediMed's cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap has us a bit worried. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. Taking a deeper dive, we've spotted 6 warning signs for ImpediMed you should be aware of, and 1 of them shouldn't be ignored.
Of course ImpediMed may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.
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