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We can readily understand why investors are attracted to unprofitable companies. For example, Optiscan Imaging (ASX:OIL) shareholders have done very well over the last year, with the share price soaring by 122%. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given its strong share price performance, we think it's worthwhile for Optiscan Imaging shareholders to consider whether its cash burn is concerning. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for Optiscan Imaging
Does Optiscan Imaging Have A Long 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. When Optiscan Imaging last reported its balance sheet in June 2021, it had zero debt and cash worth AU$8.4m. Importantly, its cash burn was AU$2.2m over the trailing twelve months. Therefore, from June 2021 it had 3.9 years of cash runway. There's no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.
How Is Optiscan Imaging's Cash Burn Changing Over Time?
Although Optiscan Imaging had revenue of AU$2.2m in the last twelve months, its operating revenue was only AU$890k in that time period. Given how low that operating leverage is, we think it's too early to put much weight on the revenue growth, so we'll focus on how the cash burn is changing, instead. During the last twelve months, its cash burn actually ramped up 52%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. Admittedly, we're a bit cautious of Optiscan Imaging due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Easily Can Optiscan Imaging Raise Cash?
While Optiscan Imaging does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. 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 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).