Stock Analysis

We're Hopeful That BELLUS Health (TSE:BLU) Will Use Its Cash Wisely

TSX:BLU
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We can readily understand why investors are attracted to unprofitable companies. For example, BELLUS Health (TSE:BLU) shareholders have done very well over the last year, with the share price soaring by 137%. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given its strong share price performance, we think it's worthwhile for BELLUS Health shareholders to consider whether its cash burn is concerning. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for BELLUS Health

When Might BELLUS Health 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 2021, BELLUS Health had cash of US$249m and no debt. Importantly, its cash burn was US$61m over the trailing twelve months. That means it had a cash runway of about 4.1 years as of December 2021. Importantly, analysts think that BELLUS Health will reach cashflow breakeven in 5 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
TSX:BLU Debt to Equity History May 5th 2022

How Is BELLUS Health's Cash Burn Changing Over Time?

In our view, BELLUS Health doesn't yet produce significant amounts of operating revenue, since it reported just US$16k in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. The skyrocketing cash burn up 102% year on year certainly tests our nerves. With spending growing that quickly, shareholders will be hoping that the money is prudently spent. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Easily Can BELLUS Health Raise Cash?

While BELLUS Health does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

BELLUS Health has a market capitalisation of US$929m and burnt through US$61m last year, which is 6.6% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

So, Should We Worry About BELLUS Health's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way BELLUS Health is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Although we do find its increasing cash burn 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. One real positive is that analysts are forecasting that the company will reach breakeven. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. On another note, BELLUS Health has 5 warning signs (and 1 which is significant) 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 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. 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.