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 the natural question for Modelon (STO:MODEL B) shareholders is whether they should be concerned about its cash burn rate. 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 will start by comparing its cash consumption with its cash reserves in order to calculate its cash trail.
Discover our latest analysis for Modelon
Does Modelon 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. As of December 2021, Modelon had cash of 169 million kr and no debt. Last year, its cash burn was 19 million kr. That means it had a cash trail of around 8.8 years in December 2021. Crucially, however, the only analyst we see covering the stock thinks Modelon will break even before then. If that happens, then the length of his cash trail today would become a moot point. Below you can see how its liquidity has changed over time.
How is Modelon growing?
One thing shareholders should keep in mind is that Modelon has increased its cash burn by 3,117% over the past twelve months. While this in itself is concerning, the fact that operating revenue actually fell 39% over the same period makes us positively cautious. In light of the above, we are quite suspicious of the trajectory the company appears to be on. While the past is always worth studying, it is the future that matters most. For this reason, it makes a lot of sense to take a look at our analysts’ forecasts for the company.
Can Modelon raise more money easily?
While Modelon appears to be in a pretty good position, it’s still worth considering how easily it could raise more cash, if only to fuel faster growth. In general, a listed company can raise new funds by issuing shares or by going into debt. Typically, a company will sell new stock on its own to raise cash and drive growth. By comparing a company’s annual cash burn to its total market capitalization, we can roughly estimate how many shares it would need to issue to keep the company running for another year (at the same burn rate).
Modelon’s cash burn of kr 19 million represents approximately 6.4% of its market capitalization of kr 302 million. This is a small proportion, so we think the company would be able to raise more cash to fund growth, with a bit of dilution, or even just borrow money.
So should we be worried about Modelon’s cash burn?
On this analysis of Modelon’s cash burn, we think its cash trail was reassuring, while its growing cash burn worries us a bit. Shareholders can rejoice that at least one analyst predicts it will break even. Given all the factors discussed in this article, we’re not overly concerned about the company’s cash burn, although we think shareholders should keep an eye on how it’s doing. A thorough review of the risks revealed 3 warning signs for Modelon readers should consider before committing capital to this title.
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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.