There’s no doubt that money can be made by owning shares of unprofitable businesses. 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. 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.
So, the natural question for KalVista Pharmaceuticals (NASDAQ:KALV) 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’. We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
How Long Is KalVista Pharmaceuticals’s Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. In October 2019, KalVista Pharmaceuticals had US$93m in cash, and was debt-free. In the last year, its cash burn was US$41m. So it had a cash runway of about 2.3 years from October 2019. Arguably, that’s a prudent and sensible length of runway to have. The image below shows how its cash balance has been changing over the last few years.
Is KalVista Pharmaceuticals’s Revenue Growing?
We’re hesitant to extrapolate on the recent trend to assess its cash burn, because KalVista Pharmaceuticals actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Unfortunately, the last year has been a disappointment, with operating revenue dropping 14% during the period. 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 Easily Can KalVista Pharmaceuticals Raise Cash?
Since its revenue growth is moving in the wrong direction, KalVista Pharmaceuticals shareholders may wish to think ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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.
KalVista Pharmaceuticals has a market capitalisation of US$331m and burnt through US$41m last year, which is 12% of the company’s market value. Given that situation, it’s fair to say the company wouldn’t have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
Is KalVista Pharmaceuticals’s Cash Burn A Worry?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought KalVista Pharmaceuticals’s cash runway was relatively promising. Considering all the factors discussed in this article, we’re not overly concerned about the company’s cash burn, although we do think shareholders should keep an eye on how it develops. Notably, our data indicates that KalVista Pharmaceuticals 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 companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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