Yahoo Finance Here's Why We're Not At All Concerned With Orthocell's (ASX:OCC) Cash Burn Situation
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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we'd take a look at whether Orthocell (ASX:OCC) 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
View our latest analysis for Orthocell
When Might Orthocell Run Out Of Money?
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. As at December 2020, Orthocell had cash of AU$18m and no debt. Looking at the last year, the company burnt through AU$3.8m. Therefore, from December 2020 it had 4.6 years of cash runway. A runway of this length affords the company the time and space it needs to develop the business. Depicted below, you can see how its cash holdings have changed over time.
How Is Orthocell's Cash Burn Changing Over Time?
In our view, Orthocell doesn't yet produce significant amounts of operating revenue, since it reported just AU$798k in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 53% over the last year suggests some degree of prudence. Orthocell makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Easily Can Orthocell Raise Cash?
While we're comforted by the recent reduction evident from our analysis of Orthocell's cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Since it has a market capitalisation of AU$110m, Orthocell's AU$3.8m in cash burn equates to about 3.5% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
How Risky Is Orthocell's Cash Burn Situation?
It may already be apparent to you that we're relatively comfortable with the way Orthocell is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. But it's fair to say that its cash burn reduction was also very reassuring. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Orthocell (2 make us uncomfortable!) 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 insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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