Here's Why We're Watching ITOXI's (KOSDAQ:052770) Cash Burn Situation

Simply Wall St · 10/14 22:42

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for ITOXI (KOSDAQ:052770) 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.

View our latest analysis for ITOXI

Does ITOXI Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at June 2024, ITOXI had cash of ₩8.9b and no debt. Looking at the last year, the company burnt through ₩7.3b. That means it had a cash runway of around 15 months as of June 2024. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
KOSDAQ:A052770 Debt to Equity History October 14th 2024

How Well Is ITOXI Growing?

Notably, ITOXI actually ramped up its cash burn very hard and fast in the last year, by 176%, signifying heavy investment in the business. That's pretty alarming given that operating revenue dropped 55% over the last year, though the business is likely attempting a strategic pivot. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how ITOXI has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can ITOXI Raise Cash?

ITOXI revenue is declining and its cash burn is increasing, so many may be considering its need to raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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).

ITOXI has a market capitalisation of ₩73b and burnt through ₩7.3b last year, which is 10% of the company's market value. 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 ITOXI's Cash Burn Situation?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought ITOXI's cash burn relative to its market cap was relatively promising. Summing up, we think the ITOXI's cash burn is a risk, based on the factors we mentioned in this article. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for ITOXI (1 is significant!) that you should be aware of before investing here.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies with significant insider holdings, and this list of stocks growth stocks (according to analyst forecasts)