There’s no doubt that money can be made by owning shares of unprofitable businesses. By way of example, Matinas BioPharma Holdings (NYSEMKT:MTNB) has seen its share price rise 168% over the last year, delighting many shareholders. 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.
Given its strong share price performance, we think it’s worthwhile for Matinas BioPharma Holdings shareholders to consider whether its cash burn is concerning. 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). First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
How Long Is Matinas BioPharma Holdings’s Cash Runway?
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 September 2019, Matinas BioPharma Holdings had cash of US$33m and no debt. Looking at the last year, the company burnt through US$12m. That means it had a cash runway of about 2.7 years as of September 2019. Notably, analysts forecast that Matinas BioPharma Holdings will break even (at a free cash flow level) in about 4 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. You can see how its cash balance has changed over time in the image below.
How Is Matinas BioPharma Holdings’s Cash Burn Changing Over Time?
In our view, Matinas BioPharma Holdings doesn’t yet produce significant amounts of operating revenue, since it reported just US$90k 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. With the cash burn rate up 19% 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. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Easily Can Matinas BioPharma Holdings Raise Cash?
Given its cash burn trajectory, Matinas BioPharma Holdings shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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 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).
Matinas BioPharma Holdings’s cash burn of US$12m is about 4.7% of its US$262m market capitalisation. 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 Matinas BioPharma Holdings’s Cash Burn Situation?
As you can probably tell by now, we’re not too worried about Matinas BioPharma Holdings’s cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While its increasing cash burn wasn’t great, the other factors mentioned in this article more than make up for weakness on that measure. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. After taking into account the various metrics mentioned in this report, we’re pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. While it’s important to consider hard data like the metrics discussed above, many investors would also be interested to note that Matinas BioPharma Holdings insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
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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