Yahoo Finance Here's Why We're Watching Intelligent Ultrasound Group's (LON:MED) Cash Burn Situation
There's no doubt that money can be made by owning shares of unprofitable businesses. By way of example, Intelligent Ultrasound Group (LON:MED) has seen its share price rise 160% over the last year, delighting many shareholders. 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 Intelligent Ultrasound Group's cash burn is. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). Let's start with an examination of the business's cash, relative to its cash burn.
See our latest analysis for Intelligent Ultrasound Group
Does Intelligent Ultrasound Group Have A Long 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 Intelligent Ultrasound Group last reported its balance sheet in December 2019, it had zero debt and cash worth UK£7.3m. Importantly, its cash burn was UK£4.1m over the trailing twelve months. So it had a cash runway of approximately 21 months from December 2019. 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. The image below shows how its cash balance has been changing over the last few years.
How Well Is Intelligent Ultrasound Group Growing?
Some investors might find it troubling that Intelligent Ultrasound Group is actually increasing its cash burn, which is up 19% in the last year. The revenue growth of 11% gives a ray of hope, at the very least. In light of the data above, we're fairly sanguine about the business growth trajectory. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Intelligent Ultrasound Group is building its business over time.
How Easily Can Intelligent Ultrasound Group Raise Cash?
While Intelligent Ultrasound Group 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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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 UK£27m, Intelligent Ultrasound Group's UK£4.1m in cash burn equates to about 15% of its market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
So, Should We Worry About Intelligent Ultrasound Group's Cash Burn?
On this analysis of Intelligent Ultrasound Group's cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. 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 Intelligent Ultrasound Group's situation. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Intelligent Ultrasound Group (2 are a bit concerning!) that you should be aware of before investing here.
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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