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, 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 Spectral MD Holdings (LON:SMD) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Check out our latest analysis for Spectral MD Holdings
Does Spectral MD Holdings Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2022, Spectral MD Holdings had US$16m in cash, and was debt-free. Importantly, its cash burn was US$1.7m over the trailing twelve months. That means it had a cash runway of about 9.4 years as of June 2022. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. Depicted below, you can see how its cash holdings have changed over time.
Is Spectral MD Holdings' Revenue Growing?
We're hesitant to extrapolate on the recent trend to assess its cash burn, because Spectral MD Holdings actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Although it's hardly brilliant growth, it's good to see the company grew revenue by 18% in the last year. 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 Easily Can Spectral MD Holdings Raise Cash?
Notwithstanding Spectral MD Holdings' revenue growth, it is still important to consider how it could raise more money, if it needs to. Companies can raise capital through either debt or equity. 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.
Spectral MD Holdings has a market capitalisation of US$55m and burnt through US$1.7m last year, which is 3.0% of the company's market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.