Here's Why We're Not Too Worried About Cardiol Therapeutics' (TSE:CRDL) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should Cardiol Therapeutics (TSE:CRDL) shareholders be worried about its cash burn? In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View 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 2021, Cardiol Therapeutics had cash of CA$29m and no debt. Importantly, its cash burn was CA$22m over the trailing twelve months. Therefore, from September 2021 it had roughly 16 months of cash runway. Importantly, analysts think that Cardiol Therapeutics will reach cashflow breakeven in around 21 months. So there's a very good chance it won't need more cash, when you consider the burn rate will be reducing in that period. Depicted below, you can see how its cash holdings have changed over time.

How Is Cardiol Therapeutics' Cash Burn Changing Over Time?

Whilst it's great to see that Cardiol Therapeutics has already begun generating revenue from operations, last year it only produced CA$79k, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. The skyrocketing cash burn up 127% year on year certainly tests our nerves. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. 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 Cardiol Therapeutics Raise Cash?

Given its cash burn trajectory, Cardiol Therapeutics shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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.

Cardiol Therapeutics has a market capitalisation of CA$167m and burnt through CA$22m last year, which is 13% of the company's market value. 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.

So, Should We Worry About Cardiol Therapeutics' Cash Burn?

On this analysis of Cardiol Therapeutics' cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. It's clearly very positive to see that analysts are forecasting the company will break even fairly soon. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Cardiol Therapeutics (of which 2 are concerning!) you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.