There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So, the natural question for PharmAust (ASX:PAA) shareholders is whether they should be concerned by its rate of cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let's start with an examination of the business' cash, relative to its cash burn.
When Might PharmAust Run Out Of Money?
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. As at December 2021, PharmAust had cash of AU$2.6m and such minimal debt that we can ignore it for the purposes of this analysis. Importantly, its cash burn was AU$1.5m over the trailing twelve months. Therefore, from December 2021 it had roughly 21 months of cash runway. 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. The image below shows how its cash balance has been changing over the last few years.
How Well Is PharmAust Growing?
It was quite stunning to see that PharmAust increased its cash burn by 206% over the last year. While operating revenue was up over the same period, the 6.8% gain gives us scant comfort. Considering these two factors together makes us nervous about the direction the company seems to be heading. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how PharmAust has developed its business over time by checking this visualization of its revenue and earnings history.
Can PharmAust Raise More Cash Easily?
Given the trajectory of PharmAust's cash burn, many investors will already be thinking about how it might raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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.
PharmAust's cash burn of AU$1.5m is about 4.7% of its AU$32m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
So, Should We Worry About PharmAust's Cash Burn?
On this analysis of PharmAust's cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about PharmAust's situation. An in-depth examination of risks revealed 2 warning signs for PharmAust that readers should think about before committing capital to this stock.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.