Here's Why We're Not Too Worried About Alcidion Group's (ASX:ALC) Cash Burn Situation

editorial-team@simplywallst.com (Simply Wall St)

Thu, Feb 29, 2024, 4:21 PM 4 min read

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for Alcidion Group (ASX:ALC) shareholders is whether they should be concerned by its rate of cash burn. 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Alcidion Group

Does Alcidion Group Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Alcidion Group last reported its December 2023 balance sheet in February 2024, it had zero debt and cash worth AU$7.9m. Importantly, its cash burn was AU$6.5m over the trailing twelve months. That means it had a cash runway of around 15 months as of December 2023. Importantly, analysts think that Alcidion Group will reach cashflow breakeven in around 20 months. That means it doesn't have a great deal of breathing room, but it shouldn't really need more cash, considering that cash burn should be continually reducing. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis — ASX:ALC Debt to Equity History February 29th 2024

How Well Is Alcidion Group Growing?

Notably, Alcidion Group actually ramped up its cash burn very hard and fast in the last year, by 156%, signifying heavy investment in the business. That's not ideal, but we're made even more nervous given that operating revenue was flat over the same period. Considering both these metrics, we're a little concerned about how the company is developing. 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 Alcidion Group To Raise More Cash For Growth?

Alcidion Group revenue is declining and its cash burn is increasing, so many may be considering its need to raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Alcidion Group has a market capitalisation of AU$67m and burnt through AU$6.5m last year, which is 9.7% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is Alcidion Group's Cash Burn A Worry?

On this analysis of Alcidion Group's cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Alcidion Group's situation. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for Alcidion Group that investors should know when investing in the stock.

Of course Alcidion Group 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.