We are not very worried about the cash burn rate of Creo Medical (LON:CREO)

There is no doubt that it is possible to make money by owning shares of unprofitable companies. For example, biotechnology and mining exploration companies often lose money for years before succeeding with a new treatment or mineral discovery. 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 the natural question for Medical Creo (LON:CREO) shareholders is whether they should be concerned about its cash burn rate. 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.

Check out our latest analysis for Creo Medical

How long does the Creo Medical cash trail last?

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. As of June 2020, Creo Medical had cash of £71m and debt so minimal that we can ignore it for the purposes of this analysis. Last year his cash burn was £17m. It therefore had a cash trail of approximately 4.1 years as of June 2020. A cash trail of this length gives the business the time and space it needs to grow its business. You can see how his cash balance has changed over time in the image below.


How is Creo Medical’s cash burn changing over time?

In the last year, Creo Medical had a turnover of UK£8.2,000, but its operating income was lower at just £8.2,000. We don’t think that’s enough operating revenue for us to understand revenue growth rates too much, as the company is growing from a low base. So we’re going to focus on cash burn today. Over the past year, its cash burn has actually increased by 25%, suggesting that management is increasing its investments in future growth, but not too quickly. This isn’t necessarily a bad thing, but investors should be aware that it will shorten the cash trail. Creo Medical makes us a bit nervous due to its lack of substantial operating revenue. We therefore generally prefer stocks from this list of stocks whose analysts predict growth.

How easily can Creo Medical raise funds?

Given its cash burn trajectory, Creo Medical shareholders may want to consider how easily it could raise more cash, despite its strong cash trail. 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 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).

Creo Medical has a market capitalization of £304m and burned £17m last year, or 5.7% of the company’s market value. 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 Creo Medical’s cash burn?

As you can probably tell by now, we’re not too worried about Creo Medical’s cash burn. In particular, we think its cash trail stands out as proof that the company is on top of spending. While its growing cash burn gives us reason to pause, the other metrics we’ve discussed in this article paint an overall positive picture. Looking at all the metrics in this article, together, we’re not worried about its cash burn rate; the company appears to be well above its medium-term spending needs. In addition, Creo Medical has 4 warning signs (and 2 that are concerning) that we think you should know about.

If you prefer to consult another company with better fundamentals, do not miss this free list of interesting companies, which have a high return on equity and low debt or this list of stocks which should all grow.

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. 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.

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