Australia Markets open in 9 hrs 39 mins

Here's Why We're Not Too Worried About Medlab Clinical's (ASX:MDC) Cash Burn Situation

·3-min read

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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given this risk, we thought we'd take a look at whether Medlab Clinical (ASX:MDC) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Medlab Clinical

When Might Medlab Clinical 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. As at June 2021, Medlab Clinical had cash of AU$13m and such minimal debt that we can ignore it for the purposes of this analysis. Importantly, its cash burn was AU$10m over the trailing twelve months. That means it had a cash runway of around 15 months as of June 2021. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
debt-equity-history-analysis

How Well Is Medlab Clinical Growing?

On balance, we think it's mildly positive that Medlab Clinical trimmed its cash burn by 2.1% over the last twelve months. Having said that, the revenue growth of 54% was considerably more inspiring. It seems to be growing nicely. 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.

How Hard Would It Be For Medlab Clinical To Raise More Cash For Growth?

Even though it seems like Medlab Clinical is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Companies can raise capital through either debt or equity. 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.

Since it has a market capitalisation of AU$58m, Medlab Clinical's AU$10m in cash burn equates to about 18% of its market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

So, Should We Worry About Medlab Clinical's Cash Burn?

The good news is that in our view Medlab Clinical's cash burn situation gives shareholders real reason for optimism. One the one hand we have its solid cash runway, while on the other it can also boast very strong revenue growth. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Medlab Clinical's situation. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 3 warning signs for Medlab Clinical that investors should know when investing in the stock.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting