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We think Ilika (LON:IKA) can afford to drive business growth
Even when a company is losing money, it’s possible for shareholders to make money if they buy a good business at the right price. For example, although software-as-a-service company Salesforce.com lost money for years while growing recurring revenue, if you had held shares since 2005, you would have done very well. However, only a fool would ignore the risk of a loss-making company burning through its cash too quickly.
So it should Ilika (LON:IKA) are shareholders worried about burning cash? In this report, we will consider the company’s annual negative free cash flow, hereinafter referred to as “cash burn”. Let’s start by examining the company’s cash flow in relation to its cash burn.
See our latest analysis for Ilika
How long is Ilika’s money trail?
A cash runway is defined as the time it would take a company to run out of cash if it continued spending at its current rate of cash burn. When Ilika last reported its October 2023 balance sheet in January 2024, it had no debt and cash worth £13m. Importantly, its cash burn was £5.5m in the last twelve months. So it had a cash flow of around 2.4 years as of October 2023. That’s decent, giving the company a few years to develop its business. Pictured below, you can see how its cash reserves have changed over time.
debt-equity history analysis
How is Ilika’s cash burn changing over time?
Although Ilika had revenue of £1.8m in the last twelve months, its operating income was just £40k in that period. We don’t think this is enough operating income to understand much of the revenue growth rates, as the company is growing from a low base. So let’s focus on cash burn today. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 38% over the last year suggests some degree of prudence. 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 our analyst forecasts for the company.
How easily can Ilika raise money?
Although it has recently reduced its cash burn, shareholders should still consider how easy it would be for Ilika to raise more money in the future. Companies can raise capital through debt or equity. One of the main advantages of publicly listed companies is that they can sell shares to investors to raise money and finance growth. By analyzing a company’s cash burn relative to its market capitalization, we gain insight into how diluted shareholders would be if the company needed to raise enough cash to cover another year’s cash burn.
The story continues
As it has a market capitalization of £46m, Ilika’s cash burn of £5.5m equates to around 12% of its market value. As a result, we would risk the company being able to raise more money to grow without much trouble, albeit at the cost of some dilution.
Is Ilika’s money burn a concern?
It should be clear to you by now that we are relatively comfortable with how Ilika is spending its money. For example, we believe the cash flow suggests the company is on track. The cash burn relative to market value was not that good, but it was still very encouraging! Considering all the factors discussed in this article, we are not overly concerned about the company’s cash burn, although we believe that shareholders should keep an eye on its development. By analyzing the risks in detail, we identified 4 warning signs for Ilika that you should know before investing.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St has no position in any of the stocks mentioned.