Companies Like IQGeo Group (LON:IQG) Are In A Position To Invest In Growth

Simply Wall St

We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for IQGeo Group (LON:IQG) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for IQGeo Group

How Long Is IQGeo Group's Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. IQGeo Group has such a small amount of debt that we'll set it aside, and focus on the UK£26m in cash it held at June 2019. Importantly, its cash burn was UK£2.9m over the trailing twelve months. Therefore, from June 2019 it had 8.9 years of cash runway. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.

AIM:IQG Historical Debt, November 9th 2019

How Well Is IQGeo Group Growing?

We reckon the fact that IQGeo Group managed to shrink its cash burn by 29% over the last year is rather encouraging. Unfortunately, however, operating revenue declined by 19% during the period. Considering both these factors, we're not particularly excited by its growth profile. In reality, this article only makes a short study of the company's growth data. You can take a look at how IQGeo Group has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can IQGeo Group Raise Cash?

While IQGeo Group seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

IQGeo Group's cash burn of UK£2.9m is about 13% of its UK£22m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

How Risky Is IQGeo Group's Cash Burn Situation?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought IQGeo Group's cash runway was relatively promising. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Notably, our data indicates that IQGeo Group insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.

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.

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.

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. Thank you for reading.