Here's Why We're Not At All Concerned With Orthocell's (ASX:OCC) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Orthocell (ASX:OCC) shareholders is whether they should be concerned by its rate of 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). Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Orthocell

When Might Orthocell Run Out Of Money?

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. As at December 2020, Orthocell had cash of AU$18m and no debt. Looking at the last year, the company burnt through AU$3.8m. So it had a cash runway of about 4.6 years from December 2020. There's no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.

How Is Orthocell's Cash Burn Changing Over Time?

In our view, Orthocell doesn't yet produce significant amounts of operating revenue, since it reported just AU$798k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 53% over the last year suggests some degree of prudence. Admittedly, we're a bit cautious of Orthocell due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Easily Can Orthocell Raise Cash?

There's no doubt Orthocell's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. 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).

Orthocell's cash burn of AU$3.8m is about 3.6% of its AU$104m market capitalisation. 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.

Is Orthocell's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Orthocell's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. And even its cash burn reduction was very encouraging. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. Taking a deeper dive, we've spotted 4 warning signs for Orthocell you should be aware of, and 2 of them are a bit unpleasant.

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. 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.
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