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LightLab Sweden (STO:LLSW B) Will Have To Spend Its Cash Wisely

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for LightLab Sweden (STO:LLSW B) shareholders is whether they should be concerned by its rate of cash burn. 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. Let's start with an examination of the business's cash, relative to its cash burn.

View our latest analysis for LightLab Sweden

Does LightLab Sweden Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. LightLab Sweden has such a small amount of debt that we'll set it aside, and focus on the kr5.7m in cash it held at December 2019. In the last year, its cash burn was kr40m. Therefore, from December 2019 it had roughly 2 months of cash runway. It's extremely surprising to us that the company has allowed its cash runway to get that short! You can see how its cash balance has changed over time in the image below.

OM:LLSW B Historical Debt, February 17th 2020
OM:LLSW B Historical Debt, February 17th 2020

How Well Is LightLab Sweden Growing?

At first glance it's a bit worrying to see that LightLab Sweden actually boosted its cash burn by 23%, year on year. Also concerning, operating revenue was actually down by 16% in that time. Considering both these metrics, we're a little concerned about how the company is developing. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how LightLab Sweden is building its business over time.

Can LightLab Sweden Raise More Cash Easily?

Given its revenue and free cash flow are both moving in the wrong direction, shareholders may well be wondering how easily LightLab Sweden could raise cash. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash to drive growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

LightLab Sweden has a market capitalisation of kr127m and burnt through kr40m last year, which is 31% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

How Risky Is LightLab Sweden's Cash Burn Situation?

We must admit that we don't think LightLab Sweden is in a very strong position, when it comes to its cash burn. Although we can understand if some shareholders find its increasing cash burn acceptable, we can't ignore the fact that we consider its cash runway to be downright troublesome. Once we consider the metrics mentioned in this article together, we're left with very little confidence in the company's ability to manage its cash burn, and we think it will probably need more money. For us, it's always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the LightLab Sweden CEO receives in total remuneration.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.