Stock Analysis

We're Hopeful That Proteomics International Laboratories (ASX:PIQ) Will Use Its Cash Wisely

ASX:PIQ
Source: Shutterstock

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 Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given this risk, we thought we'd take a look at whether Proteomics International Laboratories (ASX:PIQ) shareholders should be worried about its 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Proteomics International Laboratories

SWOT Analysis for Proteomics International Laboratories

Strength
  • Currently debt free.
Weakness
  • Expensive based on P/S ratio and estimated fair value.
  • Shareholders have been diluted in the past year.
Opportunity
  • Forecast to reduce losses next year.
Threat
  • Has less than 3 years of cash runway based on current free cash flow.

When Might Proteomics International Laboratories 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 2022, Proteomics International Laboratories had cash of AU$6.8m and no debt. Importantly, its cash burn was AU$5.3m over the trailing twelve months. That means it had a cash runway of around 15 months as of December 2022. Notably, one analyst forecasts that Proteomics International Laboratories will break even (at a free cash flow level) in about 2 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
ASX:PIQ Debt to Equity History May 10th 2023

How Is Proteomics International Laboratories' Cash Burn Changing Over Time?

In the last year, Proteomics International Laboratories did book revenue of AU$3.6m, but its revenue from operations was less, at just AU$1.3m. We don't think that's enough operating revenue for us to understand too much from revenue growth rates, since the company is growing off a low base. So we'll focus on the cash burn, today. Over the last year its cash burn actually increased by a very significant 63%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can Proteomics International Laboratories Raise More Cash Easily?

Given its cash burn trajectory, Proteomics International Laboratories shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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$121m, Proteomics International Laboratories' AU$5.3m in cash burn equates to about 4.4% 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.

So, Should We Worry About Proteomics International Laboratories' Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Proteomics International Laboratories' cash burn relative to its market cap was relatively promising. One real positive is that at least one analyst is forecasting that the company will reach breakeven. 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. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 4 warning signs for Proteomics International Laboratories that investors should know when investing in the stock.

Of course Proteomics International Laboratories 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.

Valuation is complex, but we're helping make it simple.

Find out whether Proteomics International Laboratories is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.