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, 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So should MedXtractor (CSE:MXT) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
Does MedXtractor Have A Long Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. As at November 2019, MedXtractor had cash of CA$551k and no debt. In the last year, its cash burn was CA$21k. That means it had a cash runway of very many years as of November 2019. Even though this is but one measure of the company’s cash burn, the thought of such a long cash runway warms our bellies in a comforting way. Depicted below, you can see how its cash holdings have changed over time.
How Is MedXtractor’s Cash Burn Changing Over Time?
Whilst it’s great to see that MedXtractor has already begun generating revenue from operations, last year it only produced CA$452k, so we don’t think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we’ll focus on how the cash burn is tracking. The good news, from a balance sheet perspective, is that it actually reduced its cash burn by 90% in the last twelve months. While that hardly points to growth potential, it does at least suggest the company is trying to survive. Admittedly, we’re a bit cautious of MedXtractor due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Easily Can MedXtractor Raise Cash?
There’s no doubt MedXtractor’s rapidly reducing cash burn brings comfort, but even if it’s only hypothetical, it’s always worth asking how easily it could raise more money to fund further 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. 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).
Since it has a market capitalisation of CA$1.7m, MedXtractor’s CA$21k in cash burn equates to about 1.3% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
How Risky Is MedXtractor’s Cash Burn Situation?
It may already be apparent to you that we’re relatively comfortable with the way MedXtractor is burning through its cash. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. And even its cash burn relative to its market cap was very encouraging. After taking into account the various metrics mentioned in this report, we’re pretty comfortable with how the company is spending its cash. Taking a deeper dive, we’ve spotted 4 warning signs for MedXtractor you should be aware of, and 3 of them are a bit concerning.
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.
If you spot an error that warrants correction, please contact the editor at [email protected] 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.
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