We Think Heidelberg Pharma (ETR:HPHA) Needs To Drive Business Growth Carefully

We can readily understand why investors are attracted to unprofitable companies. For example, Heidelberg Pharma (ETR:HPHA) shareholders have done very well over the last year, with the share price soaring by 230%. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

In light of its strong share price run, we think now is a good time to investigate how risky Heidelberg Pharma's cash burn is. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Heidelberg Pharma

When Might Heidelberg Pharma 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. In August 2020, Heidelberg Pharma had €9.2m in cash, and was debt-free. Looking at the last year, the company burnt through €18m. So it had a cash runway of approximately 6 months from August 2020. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Heidelberg Pharma Growing?

Heidelberg Pharma boosted investment sharply in the last year, with cash burn ramping by 77%. But the silver lining is that operating revenue increased by 27% in that time. In light of the data above, we're fairly sanguine about the business growth trajectory. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Easily Can Heidelberg Pharma Raise Cash?

Since Heidelberg Pharma has been boosting its cash burn, the market will likely be considering how it can raise more cash if need be. 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.

Since it has a market capitalisation of €245m, Heidelberg Pharma's €18m in cash burn equates to about 7.2% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

So, Should We Worry About Heidelberg Pharma's Cash Burn?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Heidelberg Pharma's cash burn relative to its market cap was relatively promising. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Heidelberg Pharma (1 shouldn't be ignored!) that you should be aware of before investing here.

Of course Heidelberg Pharma 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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