Stock Analysis

We Think Universal Biosensors (ASX:UBI) Can Afford To Drive Business Growth

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ASX:UBI
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Just because a business does not make any money, does not mean that the stock will go down. For example, Universal Biosensors (ASX:UBI) shareholders have done very well over the last year, with the share price soaring by 233%. 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.

Given its strong share price performance, we think it's worthwhile for Universal Biosensors shareholders to consider whether its cash burn is concerning. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Universal Biosensors

Does Universal Biosensors Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. Universal Biosensors has such a small amount of debt that we'll set it aside, and focus on the AU$21m in cash it held at March 2021. Importantly, its cash burn was AU$8.6m over the trailing twelve months. Therefore, from March 2021 it had 2.4 years of cash runway. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
ASX:UBI Debt to Equity History May 14th 2021

How Well Is Universal Biosensors Growing?

Happily, Universal Biosensors is travelling in the right direction when it comes to its cash burn, which is down 57% over the last year. Unfortunately, however, operating revenue dropped 24% during the same time frame. On balance, we'd say the company is improving over time. Of course, we've only taken a quick look at the stock's growth metrics, here. 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 Hard Would It Be For Universal Biosensors To Raise More Cash For Growth?

Universal Biosensors seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Since it has a market capitalisation of AU$122m, Universal Biosensors' AU$8.6m in cash burn equates to about 7.1% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

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. For example, we think its cash runway suggests that the company is on a good path. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. 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. On another note, Universal Biosensors has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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