Yahoo Finance We Think IOUpay (ASX:IOU) Needs To Drive Business Growth Carefully
There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should IOUpay (ASX:IOU) shareholders 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.
Check out our latest analysis for IOUpay
How Long Is IOUpay's Cash Runway?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. In December 2021, IOUpay had AU$15m in cash, and was debt-free. Looking at the last year, the company burnt through AU$15m. That means it had a cash runway of around 13 months as of December 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.
How Well Is IOUpay Growing?
One thing for shareholders to keep front in mind is that IOUpay increased its cash burn by 694% in the last twelve months. While that certainly gives us pause for thought, we take a lot of comfort in the strong annual revenue growth of 50%. Considering both these factors, we're not particularly excited by its growth profile. In reality, this article only makes a short study of the company's growth data. You can take a look at how IOUpay is growing revenue over time by checking this visualization of past revenue growth.
How Hard Would It Be For IOUpay To Raise More Cash For Growth?
While IOUpay seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and 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.
IOUpay's cash burn of AU$15m is about 31% of its AU$48m market capitalisation. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.
How Risky Is IOUpay's Cash Burn Situation?
On this analysis of IOUpay's cash burn, we think its revenue growth was reassuring, while its increasing cash burn has us a bit worried. Summing up, we think the IOUpay's cash burn is a risk, based on the factors we mentioned in this article. On another note, IOUpay has 3 warning signs (and 1 which is significant) we think you should know about.
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.
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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.
