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. By way of example, Universal Biosensors (ASX:UBI) has seen its share price rise 174% over the last year, delighting many shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
In light of its strong share price run, we think now is a good time to investigate how risky Universal Biosensors' cash burn is. 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 Universal Biosensors Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. Universal Biosensors has such a small amount of debt that we'll set it aside, and focus on the AU$23m in cash it held at September 2020. Importantly, its cash burn was AU$5.8m over the trailing twelve months. So it had a cash runway of about 4.0 years from September 2020. A runway of this length affords the company the time and space it needs to develop the business. Depicted below, you can see how its cash holdings have changed over time.
Is Universal Biosensors' Revenue Growing?
Given that Universal Biosensors actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. The grim reality for shareholders is that operating revenue fell by 79% over the last twelve months, which is not what we want to see in a cash burning company. In reality, this article only makes a short study of the company's growth data. You can take a look at how Universal Biosensors has developed its business over time by checking this visualization of its revenue and earnings history.
How Easily Can Universal Biosensors Raise Cash?
Since its revenue growth is moving in the wrong direction, Universal Biosensors shareholders may wish to think ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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 AU$90m, Universal Biosensors' AU$5.8m in cash burn equates to about 6.5% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
How Risky Is Universal Biosensors' Cash Burn Situation?
It may already be apparent to you that we're relatively comfortable with the way Universal Biosensors is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While we must concede that its falling revenue is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Taking an in-depth view of risks, we've identified 3 warning signs for Universal Biosensors that you should be aware of before investing.
Of course Universal Biosensors 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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