Even when a business is losing money, it’s possible for shareholders to make money if they buy a good business at the right price. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we’d take a look at whether Quantum Genomics Société Anonyme (EPA:ALQGC) shareholders should be worried about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Let’s start with an examination of the business’s cash, relative to its cash burn.
How Long Is Quantum Genomics Société Anonyme’s Cash Runway?
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. Quantum Genomics Société Anonyme has such a small amount of debt that we’ll set it aside, and focus on the €12m in cash it held at June 2019. Importantly, its cash burn was €12m over the trailing twelve months. So it had a cash runway of approximately 12 months from June 2019. That’s quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.
How Is Quantum Genomics Société Anonyme’s Cash Burn Changing Over Time?
Quantum Genomics Société Anonyme didn’t record any revenue over the last year, indicating that it’s an early stage company still developing its 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 21%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company’s true cash runway will therefore be shorter than suggested above, if spending continues to increase. 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 Quantum Genomics Société Anonyme To Raise More Cash For Growth?
Given its cash burn trajectory, Quantum Genomics Société Anonyme shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Companies can raise capital through either debt or equity. 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).
Since it has a market capitalisation of €51m, Quantum Genomics Société Anonyme’s €12m in cash burn equates to about 23% of its market value. That’s not insignificant, and if the company had to sell enough shares to fund another year’s growth at the current share price, you’d likely witness fairly costly dilution.
How Risky Is Quantum Genomics Société Anonyme’s Cash Burn Situation?
We must admit that we don’t think Quantum Genomics Société Anonyme is in a very strong position, when it comes to its cash burn. Although we can understand if some shareholders find its cash runway acceptable, we can’t ignore the fact that we consider its increasing cash burn to be downright troublesome. Summing up, we think the Quantum Genomics Société Anonyme’s cash burn is a risk, based on the factors we mentioned in this article. For us, it’s always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the Quantum Genomics Société Anonyme CEO receives in total remuneration.
Of course Quantum Genomics Société Anonyme may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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