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 example, although software-as-a-service company Salesforce.com lost money for years as it grew recurring revenue, if you had held stock since 2005, you would have done very well. But the harsh reality is that many, many loss-making companies burn all their money and go bankrupt.
So should lumito (NGM:LUMITO) are shareholders worried about its consumption of cash? For the purposes of this article, cash burn is the annual rate at which an unprofitable business spends money to finance its growth; its negative free cash flow. Let’s start with a review of the company’s cash flow, relative to its cash burn.
Our analysis indicates that Lumito is potentially overvalued!
Does Lumito have a long cash trail?
A cash trail is defined as the length of time it would take a business to run out of cash if it continued to spend at its current rate of cash consumption. When Lumito last published its balance sheet in June 2022, it had no debt and cash worth 32 million kr. Last year, its cash consumption was 34 million kr. This means that it had a cash trail of around 11 months in June 2022. This is a fairly short cash trail, indicating that the company either needs to reduce its annual cash burn or rebuild its cash. Below you can see how its liquidity has changed over time.
How is Lumito’s cash burn changing over time?
Since Lumito is not currently generating revenue, we consider it to be a start-up company. Nonetheless, we can still look at its cash burn trajectory as part of our assessment of its cash burn situation. It turns out that the company’s cash burn has fallen by 27% over the past year, suggesting that management is aware of the possibility of running out of cash. Lumito makes us a bit nervous due to its lack of substantial operating revenue. We prefer most stocks over this list of stocks that analysts expect to see grow.
How difficult would it be for Lumito to raise more cash for growth?
As Lumito shows a solid reduction in its cash burn, it’s 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. One of the main advantages of publicly traded companies is that they can sell shares to investors to raise funds and finance their growth. By looking at a company’s cash burn relative to its market cap, we get insight into how much of a shareholder base would be diluted if the company needed to raise enough cash to cover a company’s cash burn. another year.
Lumito’s cash burn of kr 34 million represents approximately 12% of its market capitalization of kr 286 million. As a result, we risk the company being able to raise more cash for growth without too much trouble, but at the cost of some dilution.
Is Lumito’s cash burn a concern?
On this analysis of Lumito’s cash burn, we think its cash burn relative to its market capitalization was reassuring, while its cash trail has us a bit worried. While we don’t think it has a problem with its cash burn, the analysis we’ve done in this article suggests that shareholders should think carefully about the potential cost of raising more money in the future. Taking a deeper dive, we spotted 6 warning signs for Lumito you should be aware of, and 4 of them are significant.
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Find out if lumito is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.