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, Sedana Medical (STO:SEDANA) shareholders have done very well over the last year, with the share price soaring by 113%. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
In light of its strong share price run, we think now is a good time to investigate how risky Sedana Medical’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). The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
How Long Is Sedana Medical’s Cash Runway?
A company’s cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Sedana Medical last reported its balance sheet in June 2020, it had zero debt and cash worth kr434m. Looking at the last year, the company burnt through kr77m. That means it had a cash runway of about 5.6 years as of June 2020. Notably, however, the one analyst we see covering the stock thinks that Sedana Medical will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.
How Well Is Sedana Medical Growing?
Sedana Medical boosted investment sharply in the last year, with cash burn ramping by 63%. While that isa little concerning at a glance, the company has a track record of recent growth, evidenced by the impressive 76% growth in revenue, over the very same year. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Hard Would It Be For Sedana Medical To Raise More Cash For Growth?
We are certainly impressed with the progress Sedana Medical has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund 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. Many companies end up issuing new shares to fund future 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.
Sedana Medical has a market capitalisation of kr5.8b and burnt through kr77m last year, which is 1.3% of the company’s 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 Sedana Medical’s Cash Burn Situation?
As you can probably tell by now, we’re not too worried about Sedana Medical’s cash burn. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. While its increasing cash burn wasn’t great, the other factors mentioned in this article more than make up for weakness on that measure. One real positive is that at least one analyst is forecasting that the company will reach breakeven. Taking all the factors in this report into account, we’re not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. Taking an in-depth view of risks, we’ve identified 1 warning sign for Sedana Medical that you should be aware of before investing.
Of course Sedana Medical may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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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. 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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