Is Microba Life Sciences (ASX:MAP) In A Good Position To Invest In Growth?

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Microba Life Sciences (ASX:MAP) shareholders be worried about its 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Microba Life Sciences

When Might Microba Life Sciences Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. Microba Life Sciences has such a small amount of debt that we'll set it aside, and focus on the AU$10m in cash it held at December 2021. Looking at the last year, the company burnt through AU$9.3m. That means it had a cash runway of around 13 months as of December 2021. Notably, one analyst forecasts that Microba Life Sciences 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. The image below shows how its cash balance has been changing over the last few years.

How Well Is Microba Life Sciences Growing?

At first glance it's a bit worrying to see that Microba Life Sciences actually boosted its cash burn by 42%, year on year. At least the revenue was up 14% during the period, even if it wasn't up by much. Considering both these factors, we're not particularly excited by its growth profile. 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 Microba Life Sciences Raise Cash?

Even though it seems like Microba Life Sciences is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.

Microba Life Sciences' cash burn of AU$9.3m is about 17% of its AU$53m market capitalisation. 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 Microba Life Sciences' Cash Burn A Worry?

On this analysis of Microba Life Sciences' cash burn, we think its revenue growth was reassuring, while its increasing cash burn has us a bit worried. One real positive is that at least one analyst is forecasting that the company will reach breakeven. 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. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 4 warning signs for Microba Life Sciences that potential shareholders should take into account before putting money into a stock.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.