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, Impression Healthcare (ASX:IHL) shareholders have done very well over the last year, with the share price soaring by 122%. 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.

So notwithstanding the buoyant share price, we think it's well worth asking whether Impression Healthcare's cash burn is too risky In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Impression Healthcare

Does Impression Healthcare Have A Long 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 Impression Healthcare last reported its balance sheet in December 2019, it had zero debt and cash worth AU$5.2m. Importantly, its cash burn was AU$2.5m over the trailing twelve months. Therefore, from December 2019 it had 2.1 years of cash runway. Arguably, that's a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.

How Is Impression Healthcare's Cash Burn Changing Over Time?

In our view, Impression Healthcare doesn't yet produce significant amounts of operating revenue, since it reported just AU$1.1m in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. With cash burn dropping by 13% it seems management feel the company is spending enough to advance its business plans at an appropriate pace. Impression Healthcare makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Hard Would It Be For Impression Healthcare To Raise More Cash For Growth?

While Impression Healthcare is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Impression Healthcare's cash burn of AU$2.5m is about 7.2% of its AU$34m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

So, Should We Worry About Impression Healthcare's Cash Burn?

As you can probably tell by now, we're not too worried about Impression Healthcare's cash burn. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. Its weak point is its cash burn reduction, but even that wasn't too bad! Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Taking a deeper dive, we've spotted 5 warning signs for Impression Healthcare you should be aware of, and 2 of them are concerning.

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)

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.