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, 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
Given this risk, we thought we'd take a look at whether Atomo Diagnostics (ASX:AT1) shareholders should be worried about its 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for Atomo Diagnostics
When Might Atomo Diagnostics Run Out Of Money?
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. As at June 2022, Atomo Diagnostics had cash of AU$13m and no debt. Importantly, its cash burn was AU$5.1m over the trailing twelve months. Therefore, from June 2022 it had 2.5 years of cash runway. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.
How Well Is Atomo Diagnostics Growing?
We reckon the fact that Atomo Diagnostics managed to shrink its cash burn by 49% over the last year is rather encouraging. Having said that, the revenue growth of 84% was considerably more inspiring. We think it is growing rather well, upon reflection. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Atomo Diagnostics is growing revenue over time by checking this visualization of past revenue growth.
How Hard Would It Be For Atomo Diagnostics To Raise More Cash For Growth?
We are certainly impressed with the progress Atomo Diagnostics has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund 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. 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).