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.