Here's Why We're Not At All Concerned With Starpharma Holdings' (ASX:SPL) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. By way of example, Starpharma Holdings (ASX:SPL) has seen its share price rise 109% over the last year, delighting many shareholders. 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.

Given its strong share price performance, we think it's worthwhile for Starpharma Holdings shareholders to consider whether its cash burn is concerning. 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 Starpharma Holdings

How Long Is Starpharma Holdings' 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. When Starpharma Holdings last reported its balance sheet in December 2020, it had zero debt and cash worth AU$70m. Looking at the last year, the company burnt through AU$11m. That means it had a cash runway of about 6.3 years as of December 2020. Notably, however, analysts think that Starpharma Holdings will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Starpharma Holdings Growing?

Some investors might find it troubling that Starpharma Holdings is actually increasing its cash burn, which is up 32% in the last year. The fact that its operating revenue tanked 80% in the last year is even more worrying. Considering these two factors together makes us nervous about the direction the company seems to be heading. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Hard Would It Be For Starpharma Holdings To Raise More Cash For Growth?

Starpharma Holdings 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. 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).

Starpharma Holdings' cash burn of AU$11m is about 1.3% of its AU$877m market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

How Risky Is Starpharma Holdings' Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Starpharma Holdings is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Although we do find its falling revenue to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. 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. Taking an in-depth view of risks, we've identified 3 warning signs for Starpharma Holdings that you should be aware of before investing.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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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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