We're Not Very Worried About Star Combo Pharma's (ASX:S66) Cash Burn Rate

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. 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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether Star Combo Pharma (ASX:S66) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Star Combo Pharma

Does Star Combo Pharma Have A Long Cash Runway?

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 June 2019, Star Combo Pharma had cash of AU$4.6m and no debt. Looking at the last year, the company burnt through AU$2.9m. That means it had a cash runway of around 19 months as of June 2019. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.

How Well Is Star Combo Pharma Growing?

Some investors might find it troubling that Star Combo Pharma is actually increasing its cash burn, which is up 8.0% in the last year. Having said that, it's revenue is up a very solid 98% in the last year, so there's plenty of reason to believe in the growth story. The company needs to keep up that growth, if it is to really please shareholders. It seems to be growing nicely. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Star Combo Pharma is growing revenue over time by checking this visualization of past revenue growth.

How Hard Would It Be For Star Combo Pharma To Raise More Cash For Growth?

Star Combo Pharma 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. 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 to fund 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).

Star Combo Pharma has a market capitalisation of AU$46m and burnt through AU$2.9m last year, which is 6.2% of the company's 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 Star Combo Pharma's Cash Burn Situation?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Star Combo Pharma's revenue growth 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. For us, it's always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the Star Combo Pharma CEO receives in total remuneration.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.