Just because a business does not make any money, does not mean that the stock will go down. 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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
Given this risk, we thought we’d take a look at whether Tonix Pharmaceuticals Holding (NASDAQ:TNXP) shareholders should be worried about its cash burn. For the purpose of this article, we’ll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). Let’s start with an examination of the business’s cash, relative to its cash burn.
Does Tonix Pharmaceuticals Holding Have A Long Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. As at March 2020, Tonix Pharmaceuticals Holding had cash of US$31m and no debt. In the last year, its cash burn was US$27m. So it had a cash runway of approximately 13 months from March 2020. That’s not too bad, but it’s fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. You can see how its cash balance has changed over time in the image below.
How Is Tonix Pharmaceuticals Holding’s Cash Burn Changing Over Time?
Because Tonix Pharmaceuticals Holding isn’t currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Over the last year its cash burn actually increased by 5.9%, which suggests that management are increasing investment in future growth, but not too quickly. That’s not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Hard Would It Be For Tonix Pharmaceuticals Holding To Raise More Cash For Growth?
While its cash burn is only increasing slightly, Tonix Pharmaceuticals Holding shareholders should still consider the potential need for further cash, down the track. 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 to drive 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).
Since it has a market capitalisation of US$34m, Tonix Pharmaceuticals Holding’s US$27m in cash burn equates to about 80% of its market value. That suggests the company may have some funding difficulties, and we’d be very wary of the stock.
Is Tonix Pharmaceuticals Holding’s Cash Burn A Worry?
Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Tonix Pharmaceuticals Holding’s cash runway was relatively promising. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. On another note, Tonix Pharmaceuticals Holding has 4 warning signs (and 1 which doesn’t sit too well with us) we think you should know about.
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