Companies Like Cardiol Therapeutics (TSE:CRDL) Are In A Position To Invest In Growth

We can readily understand why investors are attracted to unprofitable companies. 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 the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given this risk, we thought we'd take a look at whether Cardiol Therapeutics (TSE:CRDL) shareholders should be worried about its cash burn. 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Cardiol Therapeutics

How Long Is Cardiol Therapeutics' 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. As at September 2020, Cardiol Therapeutics had cash of CA$17m and no debt. Looking at the last year, the company burnt through CA$9.8m. Therefore, from September 2020 it had roughly 20 months of cash runway. Notably, analysts forecast that Cardiol Therapeutics will break even (at a free cash flow level) in about 3 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. You can see how its cash balance has changed over time in the image below.

How Is Cardiol Therapeutics' Cash Burn Changing Over Time?

Cardiol Therapeutics didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 43% over the last year suggests some degree of prudence. 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.

How Easily Can Cardiol Therapeutics Raise Cash?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Cardiol Therapeutics to raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Cardiol Therapeutics' cash burn of CA$9.8m is about 11% of its CA$91m market capitalisation. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

Is Cardiol Therapeutics' Cash Burn A Worry?

The good news is that in our view Cardiol Therapeutics' cash burn situation gives shareholders real reason for optimism. One the one hand we have its solid cash burn relative to its market cap, while on the other it can also boast very strong cash burn reduction. Shareholders can take heart from the fact that analysts are forecasting it 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 Cardiol Therapeutics that investors should know when investing in the stock.

Of course Cardiol Therapeutics 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.

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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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