We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So, the natural question for Tonix Pharmaceuticals Holding (NASDAQ:TNXP) 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’. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
When Might Tonix Pharmaceuticals Holding Run Out Of Money?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. In September 2019, Tonix Pharmaceuticals Holding had US$10m in cash, and was debt-free. In the last year, its cash burn was US$27m. That means it had a cash runway of around 4 months as of September 2019. That’s a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. 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. With the cash burn rate up 21% in the last year, it seems that the company is ratcheting up investment in the business over time. That’s not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Easily Can Tonix Pharmaceuticals Holding Raise Cash?
Since its cash burn is moving in the wrong direction, Tonix Pharmaceuticals Holding shareholders may wish to think ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. 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$14m, Tonix Pharmaceuticals Holding’s US$27m in cash burn equates to about 194% of its market value. Given just how high that expenditure is, relative to the company’s market value, we think there’s an elevated risk of funding distress, and we would be very nervous about holding the stock.
How Risky Is Tonix Pharmaceuticals Holding’s Cash Burn Situation?
There are no prizes for guessing that we think Tonix Pharmaceuticals Holding’s cash burn is a bit of a worry. In particular, we think its cash burn relative to its market cap suggests it isn’t in a good position to keep funding growth. And although we accept its increasing cash burn wasn’t as worrying as its cash burn relative to its market cap, it was still a real negative; as indeed were all the factors we considered in this article. Looking at the metrics in this article all together, we consider its cash burn situation to be rather dangerous, and likely to cost shareholders one way or the other. Notably, our data indicates that Tonix Pharmaceuticals Holding insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
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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