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. Indeed, Proteomics International Laboratories (ASX:PIQ) stock is up 234% in the last year, providing strong gains for shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So notwithstanding the buoyant share price, we think it's well worth asking whether Proteomics International Laboratories' cash burn is too risky. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Let's start with an examination of the business' cash, relative to its cash burn.
How Long Is Proteomics International Laboratories' 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. In December 2020, Proteomics International Laboratories had AU$7.5m in cash, and was debt-free. In the last year, its cash burn was AU$441k. That means it had a cash runway of very many years as of December 2020. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. Depicted below, you can see how its cash holdings have changed over time.
How Is Proteomics International Laboratories' Cash Burn Changing Over Time?
Although Proteomics International Laboratories had revenue of AU$2.4m in the last twelve months, its operating revenue was only AU$1.1m in that time period. Given how low that operating leverage is, we think it's too early to put much weight on the revenue growth, so we'll focus on how the cash burn is changing, instead. The good news, from a balance sheet perspective, is that it actually reduced its cash burn by 86% in the last twelve months. While that hardly points to growth potential, it does at least suggest the company is trying to survive. Admittedly, we're a bit cautious of Proteomics International Laboratories 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 Proteomics International Laboratories Raise Cash?
While we're comforted by the recent reduction evident from our analysis of Proteomics International Laboratories' cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.
Proteomics International Laboratories has a market capitalisation of AU$125m and burnt through AU$441k last year, which is 0.4% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
How Risky Is Proteomics International Laboratories' Cash Burn Situation?
It may already be apparent to you that we're relatively comfortable with the way Proteomics International Laboratories is burning through its cash. For example, we think its cash burn reduction suggests that the company is on a good path. But it's fair to say that its cash burn relative to its market cap was also very reassuring. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. On another note, Proteomics International Laboratories has 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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