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, 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 while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
Given this risk, we thought we'd take a look at whether CannPal Animal Therapeutics (ASX:CP1) shareholders should be worried about its 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
How Long Is CannPal Animal Therapeutics's Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In December 2019, CannPal Animal Therapeutics had AU$2.4m in cash, and was debt-free. Looking at the last year, the company burnt through AU$2.1m. That means it had a cash runway of around 14 months as of December 2019. 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.
How Is CannPal Animal Therapeutics's Cash Burn Changing Over Time?
Whilst it's great to see that CannPal Animal Therapeutics has already begun generating revenue from operations, last year it only produced AU$654k, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Over the last year its cash burn actually increased by a very significant 91%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. Admittedly, we're a bit cautious of CannPal Animal Therapeutics due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can CannPal Animal Therapeutics Raise More Cash Easily?
While CannPal Animal Therapeutics does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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).
CannPal Animal Therapeutics's cash burn of AU$2.1m is about 26% of its AU$8.2m market capitalisation. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
Is CannPal Animal Therapeutics's Cash Burn A Worry?
On this analysis of CannPal Animal Therapeutics's cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Summing up, we think the CannPal Animal Therapeutics's cash burn is a risk, based on the factors we mentioned in this article. On another note, CannPal Animal Therapeutics has 5 warning signs (and 3 which are a bit concerning) we think you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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