Cambridge Cognition Holdings (LON:COG) Is In A Good Position To Deliver On Growth Plans

Just because a business does not make any money, does not mean that the stock will go down. By way of example, Cambridge Cognition Holdings (LON:COG) has seen its share price rise 125% over the last year, delighting many shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

In light of its strong share price run, we think now is a good time to investigate how risky Cambridge Cognition Holdings' 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'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Cambridge Cognition Holdings

When Might Cambridge Cognition Holdings Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. Cambridge Cognition Holdings has such a small amount of debt that we'll set it aside, and focus on the UK£2.0m in cash it held at June 2020. Looking at the last year, the company burnt through UK£1.3m. That means it had a cash runway of around 18 months as of June 2020. Importantly, though, the one analyst we see covering the stock thinks that Cambridge Cognition Holdings will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.

How Well Is Cambridge Cognition Holdings Growing?

Some investors might find it troubling that Cambridge Cognition Holdings is actually increasing its cash burn, which is up 30% in the last year. At least the revenue was up 5.8% during the period, even if it wasn't up by much. 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. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Easily Can Cambridge Cognition Holdings Raise Cash?

Even though it seems like Cambridge Cognition Holdings is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Cambridge Cognition Holdings' cash burn of UK£1.3m is about 6.0% of its UK£21m market capitalisation. 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.

Is Cambridge Cognition Holdings' Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Cambridge Cognition Holdings is burning through its cash. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. It's clearly very positive to see that at least one analyst is forecasting the company will break even fairly soon. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 4 warning signs for Cambridge Cognition Holdings that potential shareholders should take into account before putting money into a stock.

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. 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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