Is Burcon Nutrascience Corporation (TSE:BU) Growing Too Fast?

Burcon Nutrascience Corporation (TSX:BU) continues its loss-making streak, announcing negative earnings for its latest financial year ending. A crucial question to bear in mind when you’re an investor of an unprofitable business, is whether the company will have to raise more capital in the near future. Additional cash raising may dilute the value of your shares, and since Burcon Nutrascience is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Looking at Burcon Nutrascience’s latest financial data, I will gauge when the company may run out of cash and need to raise more money. Check out our latest analysis for Burcon Nutrascience

What is cash burn?

Cash burn is when a loss-making company spends its equity to fund its expenses before making money from its day-to-day business. Currently, Burcon Nutrascience has CA$1.29M in cash holdings and producing negative cash flows from its day-to-day activities of -CA$4.46M. How fast Burcon Nutrascience runs down its cash supply over time is known as the cash burn rate. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Burcon Nutrascience operates in the specialty chemicals industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. Burcon Nutrascience faces the trade-off between running the risk of depleting its cash reserves too fast, or risk falling behind its profitable competitors by investing too slowly.

When will Burcon Nutrascience need to raise more cash?

Opex, or operational expenses, are the necessary costs Burcon Nutrascience must pay to keep the business running every day. For the purpose of this calculation I've only accounted for sales, general and admin (SG&A) expenses, and R&D expenses incurred within this year. Opex declined by 8.95% over the past year, which could be an indication of Burcon Nutrascience putting the brakes on ramping up high growth. However, this cost-reduction initiative is still not enough. Given the level of cash left in the bank, if Burcon Nutrascience maintained its opex level of CA$3.86M, it will still run out of cash within the next couples of months. Although this is a relatively simplistic calculation, and Burcon Nutrascience may continue to reduce its costs further or open a new line of credit instead of issuing new equity shares, the outcome of this analysis still helps us understand how sustainable the Burcon Nutrascience’s operation is, and when things may have to change.

Next Steps:

The risks involved in investing in loss-making Burcon Nutrascience means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. The cash burn analysis result indicates a cash constraint for the company, due to its current level of cash reserves. An opportunity may exist for you to enter into the stock at an attractive price, should Burcon Nutrascience come to market to fund its operations. Keep in mind I haven't considered other factors such as how BU is expected to perform in the future. I recommend you continue to research Burcon Nutrascience to get a better picture of the company by looking at:

1. Historical Performance: What has BU's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Burcon Nutrascience’s board and the CEO’s back ground.
3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.

NB: Figures in this article are calculated using data from the trailing twelve months from 31 December 2017. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.