Just because a business does not make any money, does not mean that the stock will go down. Indeed, Imricor Medical Systems (ASX:IMR) stock is up 101% in the last year, providing strong gains for shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

In light of its strong share price run, we think now is a good time to investigate how risky Imricor Medical Systems' cash burn is. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Imricor Medical Systems

How Long Is Imricor Medical Systems' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Imricor Medical Systems last reported its balance sheet in December 2020, it had zero debt and cash worth US$25m. In the last year, its cash burn was US$13m. Therefore, from December 2020 it had roughly 23 months of cash runway. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years. debt-equity-history-analysis

How Is Imricor Medical Systems' Cash Burn Changing Over Time?

Whilst it's great to see that Imricor Medical Systems has already begun generating revenue from operations, last year it only produced US$702k, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. During the last twelve months, its cash burn actually ramped up 85%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. 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 Imricor Medical Systems Raise Cash?

Given its cash burn trajectory, Imricor Medical Systems shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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).

Imricor Medical Systems' cash burn of US$13m is about 6.6% of its US$198m market capitalisation. 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.

How Risky Is Imricor Medical Systems' Cash Burn Situation?

On this analysis of Imricor Medical Systems' cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Imricor Medical Systems' situation. On another note, we conducted an in-depth investigation of the company, and identified 2 warning signs for Imricor Medical Systems (1 doesn't sit too well with us!) that you should be aware of before investing here.

Of course Imricor Medical Systems may not be the best stock to buy. So you may wish to see this freecollection of companies boasting high return on equity, or this list of stocks that insiders are buying.

This article by Simply Wall St is general in nature. 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.

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