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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should InDex Pharmaceuticals Holding (STO:INDEX) shareholders be worried about its cash burn? 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'.
See our latest analysis for InDex Pharmaceuticals Holding
How Long Is InDex Pharmaceuticals Holding's Cash Runway?
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 2019, InDex Pharmaceuticals Holding had kr51m in cash, and was debt-free. Looking at the last year, the company burnt through kr69m. That means it had a cash runway of around 9 months as of June 2019. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. You can see how its cash balance has changed over time in the image below.
How Is InDex Pharmaceuticals Holding's Cash Burn Changing Over Time?
In our view, InDex Pharmaceuticals Holding doesn't yet produce significant amounts of operating revenue, since it reported just kr100k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. It's possible that the 5.2% reduction in cash burn over the last year is evidence of management tightening their belts as cash reserves deplete. InDex Pharmaceuticals Holding makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can InDex Pharmaceuticals Holding Raise More Cash Easily?
While InDex Pharmaceuticals Holding 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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to 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).