We're Hopeful That Alcidion Group (ASX:ALC) Will Use Its Cash Wisely

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

Thu, Sep 26, 2024, 6:00 PM 4 min read

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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.

Given this risk, we thought we'd take a look at whether Alcidion Group (ASX:ALC) 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Alcidion Group

How Long Is Alcidion Group's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2024, Alcidion Group had cash of AU$12m and no debt. Looking at the last year, the company burnt through AU$7.2m. That means it had a cash runway of around 20 months as of June 2024. Importantly, though, analysts think that Alcidion Group will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis — ASX:ALC Debt to Equity History September 27th 2024

How Well Is Alcidion Group Growing?

It was quite stunning to see that Alcidion Group increased its cash burn by 2,420% over the last year. While that's concerning on it's own, the fact that operating revenue was actually down 8.3% over the same period makes us positively tremulous. Considering these two factors together makes us nervous about the direction the company seems to be heading. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Easily Can Alcidion Group Raise Cash?

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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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$81m and burnt through AU$7.2m last year, which is 8.9% 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.

How Risky Is Alcidion Group's Cash Burn Situation?

As you can probably tell by now, we're not too worried about Alcidion Group's cash burn. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. It's clearly very positive to see that analysts are forecasting the company will break even fairly soon. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. An in-depth examination of risks revealed 2 warning signs for Alcidion Group that readers should think about before committing capital to this 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 with high insider ownership.

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.