Just because a business does not make any money, does not mean that the stock will go down. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you’d have done very well indeed. 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 BELLUS Health (TSE:BLU) shareholders is whether they should be concerned by its rate of cash burn. 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). The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
How Long Is BELLUS Health’s Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. In June 2020, BELLUS Health had US$74m in cash, and was debt-free. Importantly, its cash burn was US$32m over the trailing twelve months. So it had a cash runway of about 2.3 years from June 2020. 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.
How Is BELLUS Health’s Cash Burn Changing Over Time?
In our view, BELLUS Health doesn’t yet produce significant amounts of operating revenue, since it reported just US$21k 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. Its cash burn positively exploded in the last year, up 248%. Given that sharp increase in spending, the company’s cash runway will shrink rapidly as it depletes its cash reserves. 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 Hard Would It Be For BELLUS Health To Raise More Cash For Growth?
Given its cash burn trajectory, BELLUS Health shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. 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 and fund growth. We can compare a company’s cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year’s operations.
BELLUS Health’s cash burn of US$32m is about 21% of its US$151m 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 BELLUS Health’s Cash Burn?
On this analysis of BELLUS Health’s cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. We don’t think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. Taking a deeper dive, we’ve spotted 5 warning signs for BELLUS Health you should be aware of, and 2 of them are a bit unpleasant.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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