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Here's Why We're Watching Invion's (ASX:IVX) Cash Burn Situation

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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given this risk, we thought we'd take a look at whether Invion (ASX:IVX) shareholders should be worried about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Invion

How Long Is Invion's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2019, Invion had cash of AU$771k and no debt. In the last year, its cash burn was AU$2.1m. That means it had a cash runway of around 4 months as of June 2019. That's a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. The image below shows how its cash balance has been changing over the last few years.

ASX:IVX Historical Debt, December 5th 2019
ASX:IVX Historical Debt, December 5th 2019

Can Invion Raise More Cash Easily?

Companies can raise capital through either debt or equity. 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).

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Invion has a market capitalisation of AU$77m and burnt through AU$2.1m last year, which is 2.7% of the company's market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

So, Should We Worry About Invion's Cash Burn?

Given it's an early stage company, we don't have a lot of data with which to judge Invion's cash burn. However, it is fair to say that its cash burn relative to its market cap gave us comfort. For us, the key takeaway here is that its cash burn is worth monitoring closely because it may have to raise more capital in due course. Notably, our data indicates that Invion insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.

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 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.