Here’s why we’re not too worried about Impression Healthcare’s (ASX:IHL) cash-sucking situation

Even when a company loses money, it is possible for shareholders to make money if they buy a good company at the right price. For instance, Health Printing (ASX: IHL) shareholders did very well last year, with the share price climbing 122%. But while the success stories are well known, investors shouldn’t ignore the many, many unprofitable companies that simply burn all their money and crash.

So, despite the buoyant share price, we think it’s worth considering whether Impression Healthcare’s cash burn is too risky. 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. The first step is to compare its cash consumption with its cash reserves, to give us its “cash trail”.

Check out our latest analysis for Impression Healthcare

Does Impression Healthcare have a long cash trail?

A company’s cash track is the time it would take to deplete its cash reserves at its current rate of cash consumption. When Impression Healthcare last published its balance sheet in December 2019, it had no debt and cash worth A$5.2 million. Importantly, its cash burn was A$2.5 million over the past twelve months. Therefore, as of December 2019, it had 2.1 years of cash trail. Arguably, this is a prudent and reasonable runway length to have. You can see how his cash balance has changed over time in the image below.

ASX: IHL Historical Debt, March 11, 2020

ASX: IHL Historical Debt, March 11, 2020

How is Impression Healthcare’s cash burn changing over time?

In our view, Impression Healthcare is not yet generating significant operating revenue, having only brought in A$1.1 million over the past twelve months. Therefore, for the purposes of this analysis, we will focus on how cash burn is tracked. With cash burn down 13%, it appears management believes the company is spending enough to move its business plans forward at an appropriate pace. Impression Healthcare makes us a bit nervous due to its lack of substantial operating revenue. We therefore generally prefer stocks of this list of stocks whose analysts predict growth.

How difficult would it be for Impression Healthcare to raise more funds for growth?

Although Impression Healthcare is showing a solid reduction in its cash burn, it is still worth considering how easily it could raise more cash, even just to fuel faster growth. In general, a listed company can raise new funds by issuing shares or by going into debt. Many companies end up issuing new shares to fund their future growth. We can compare a company’s cash burn to its market capitalization to get an idea of ​​how many new shares a company would need to issue to fund a year’s operations.

Impression Healthcare’s cash burn of A$2.5 million represents approximately 7.2% of its market capitalization of A$34 million. Since this is a rather small percentage, it would probably be very easy for the company to finance another year’s growth by issuing new shares to investors, or even taking out a loan.

So should we be worried about Impression Healthcare’s cash burn?

As you can probably tell by now, we’re not too worried about Impression Healthcare’s cash burn. In particular, we believe its cash burn relative to its market capitalization is evidence that the company is in control of its spending. Its downside is its reduced cash burn, but even that wasn’t so bad! Based on the factors mentioned in this article, we think its cash burn situation deserves some attention from shareholders, but we don’t think they should be concerned. Taking a deeper dive, we spotted 5 warning signs for Impression Healthcare you should be aware, and 2 of them are concerning.

Sure, you might find a fantastic investment by looking elsewhere. So take a look at this free list of interesting companies, and this list of growth stocks (according to analyst forecasts)

If you spot an error that needs to be corrected, please contact the editor at [email protected] This Simply Wall St article is general in nature. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Simply Wall St has no position in the stocks mentioned.

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