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We can readily understand why investors are attracted to unprofitable companies. For example, IOUpay (ASX:IOU) shareholders have done very well over the last year, with the share price soaring by 201%. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
In light of its strong share price run, we think now is a good time to investigate how risky IOUpay's cash burn is. 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'.
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. When IOUpay last reported its balance sheet in June 2021, it had zero debt and cash worth AU$51m. Importantly, its cash burn was AU$4.4m over the trailing twelve months. That means it had a cash runway of very many years as of June 2021. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. 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 1,439% in the last twelve months. That does give us pause, and we can't take much solace in the operating revenue growth of 12% in the same time frame. Considering both these metrics, we're a little concerned about how the company is developing. In reality, this article only makes a short study of the company's growth data. You can take a look at how IOUpay has developed its business over time by checking this visualization of its revenue and earnings history.
Can IOUpay Raise More Cash Easily?
IOUpay seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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).
IOUpay has a market capitalisation of AU$130m and burnt through AU$4.4m last year, which is 3.4% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
Is IOUpay's Cash Burn A Worry?
On this analysis of IOUpay's cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, IOUpay has 3 warning signs (and 1 which is significant) we think you should know about.
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)
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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