There’s no doubt that money can be made by owning shares of unprofitable businesses. By way of example, EMvision Medical Devices (ASX:EMV) has seen its share price rise 215% 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 EMvision Medical Devices’ cash burn is. 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. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
When Might EMvision Medical Devices Run Out Of Money?
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 June 2020, EMvision Medical Devices had AU$5.4m in cash, and was debt-free. In the last year, its cash burn was AU$3.3m. So it had a cash runway of approximately 20 months from June 2020. 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. Depicted below, you can see how its cash holdings have changed over time.
How Is EMvision Medical Devices’ Cash Burn Changing Over Time?
In our view, EMvision Medical Devices doesn’t yet produce significant amounts of operating revenue, since it reported just AU$1.4m in the last twelve months. As a result, we think it’s a bit early to focus on the revenue growth, so we’ll limit ourselves to looking at how the cash burn is changing over time. With the cash burn rate up 47% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company’s true cash runway will therefore be shorter than suggested above, if spending continues to increase. Of course, we’ve only taken a quick look at the stock’s growth metrics, here. You can take a look at how EMvision Medical Devices has developed its business over time by checking this visualization of its revenue and earnings history.
How Easily Can EMvision Medical Devices Raise Cash?
While EMvision Medical Devices does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and 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).
EMvision Medical Devices has a market capitalisation of AU$174m and burnt through AU$3.3m last year, which is 1.9% 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.
So, Should We Worry About EMvision Medical Devices’ Cash Burn?
On this analysis of EMvision Medical Devices’ cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. Considering all the factors discussed in this article, we’re not overly concerned about the company’s cash burn, although we do think shareholders should keep an eye on how it develops. Readers need to have a sound understanding of business risks before investing in a stock, and we’ve spotted 3 warning signs for EMvision Medical Devices that potential shareholders should take into account before putting money into a stock.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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