There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given this risk, we thought we'd take a look at whether Universal Biosensors (ASX:UBI) shareholders should be worried about its cash burn. 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'.

View our latest analysis for Universal Biosensors

When Might Universal Biosensors Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2022, Universal Biosensors had cash of AU$27m and such minimal debt that we can ignore it for the purposes of this analysis. Importantly, its cash burn was AU$16m over the trailing twelve months. That means it had a cash runway of around 21 months as of September 2022. 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. You can see how its cash balance has changed over time in the image below.

How Well Is Universal Biosensors Growing?

Universal Biosensors boosted investment sharply in the last year, with cash burn ramping by 62%. As if that's not bad enough, the operating revenue also dropped by 21%, making us very wary indeed. Taken together, we think these growth metrics are a little worrying. In reality, this article only makes a short study of the company's growth data. You can take a look at how Universal Biosensors has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For Universal Biosensors To Raise More Cash For Growth?

Universal Biosensors 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. 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 looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.