Stock Analysis

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

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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. 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.

So should PharmAust (ASX:PAA) shareholders be worried about its cash burn? 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.

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Does PharmAust Have A Long Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at December 2022, PharmAust had cash of AU$2.1m and no debt. Looking at the last year, the company burnt through AU$397k. That means it had a cash runway of about 5.2 years as of December 2022. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.

ASX:PAA Debt to Equity History March 31st 2023

How Well Is PharmAust Growing?

Happily, PharmAust is travelling in the right direction when it comes to its cash burn, which is down 74% over the last year. Pleasingly, this was achieved with the help of a 33% boost to revenue. We think it is growing rather well, upon reflection. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how PharmAust is growing revenue over time by checking this visualization of past revenue growth.

How Easily Can PharmAust Raise Cash?

We are certainly impressed with the progress PharmAust has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and 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).

PharmAust's cash burn of AU$397k is about 1.2% of its AU$33m market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

So, Should We Worry About PharmAust's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way PharmAust is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. But it's fair to say that its revenue growth was also very reassuring. Looking at all the measures in this article, together, we're not worried about its rate of cash burn, which seems to be under control. An in-depth examination of risks revealed 2 warning signs for PharmAust that readers should think about before committing capital to this stock.

Of course PharmAust 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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