Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So, the natural question for Actinogen Medical (ASX:ACW) 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’. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
Does Actinogen Medical Have A Long 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. In June 2019, Actinogen Medical had AU$7.6m in cash, and was debt-free. In the last year, its cash burn was AU$10m. That means it had a cash runway of around 9 months as of 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 Actinogen Medical’s Cash Burn Changing Over Time?
In the last year, Actinogen Medical did book revenue of AU$5.1m, but its revenue from operations was less, at just AU$205k. We don’t think that’s enough operating revenue for us to understand too much from revenue growth rates, since the company is growing off a low base. So we’ll focus on the cash burn, today. With the cash burn rate up 33% in the last year, it seems that the company is ratcheting up investment in the business over time. 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. 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 Actinogen Medical Raise Cash?
Given its cash burn trajectory, Actinogen Medical 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. 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).
Actinogen Medical’s cash burn of AU$10m is about 27% of its AU$39m market capitalisation. 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.
So, Should We Worry About Actinogen Medical’s Cash Burn?
We must admit that we don’t think Actinogen Medical is in a very strong position, when it comes to its cash burn. While its cash burn relative to its market cap wasn’t too bad, its cash runway does leave us rather nervous. 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. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Actinogen Medical CEO is paid..
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