We're Hopeful That Microba Life Sciences (ASX:MAP) Will Use Its Cash Wisely

Just because a business does not make any money, does not mean that the stock will go down. 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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given this risk, we thought we'd take a look at whether Microba Life Sciences (ASX:MAP) shareholders should 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Microba Life Sciences

When Might Microba Life Sciences Run Out Of Money?

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 December 2022, Microba Life Sciences had cash of AU$42m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was AU$14m. Therefore, from December 2022 it had 3.0 years of cash runway. A runway of this length affords the company the time and space it needs to develop the business. The image below shows how its cash balance has been changing over the last few years.

How Well Is Microba Life Sciences Growing?

Some investors might find it troubling that Microba Life Sciences is actually increasing its cash burn, which is up 50% in the last year. At least the revenue was up 9.5% during the period, even if it wasn't up by much. In light of the data above, we're fairly sanguine about the business growth trajectory. 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 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. Commonly, a business will sell new shares in itself to raise cash and drive 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 has a market capitalisation of AU$120m and burnt through AU$14m last year, which is 12% of the company's market value. 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.

So, Should We Worry About Microba Life Sciences' Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Microba Life Sciences' cash runway was relatively promising. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Taking a deeper dive, we've spotted 5 warning signs for Microba Life Sciences you should be aware of, and 1 of them can't be ignored.

Of course Microba Life Sciences 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.

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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.