Is Evgen Pharma (LON:EVG) In A Good Position To Invest In Growth?

By
Simply Wall St
Published
January 16, 2020
AIM:EVG
Source: Shutterstock

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for Evgen Pharma (LON:EVG) shareholders is whether they should be concerned by its rate of cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for Evgen Pharma

When Might Evgen Pharma Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Evgen Pharma last reported its balance sheet in September 2019, it had zero debt and cash worth UK£5.1m. In the last year, its cash burn was UK£2.5m. That means it had a cash runway of about 2.0 years as of September 2019. Arguably, that's a prudent and sensible length of runway to have. The image below shows how its cash balance has been changing over the last few years.

AIM:EVG Historical Debt, January 17th 2020
AIM:EVG Historical Debt, January 17th 2020

How Is Evgen Pharma's Cash Burn Changing Over Time?

Evgen Pharma didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. Over the last year its cash burn actually increased by 16%, which suggests that management are increasing investment in future growth, but not too quickly. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. 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 Evgen Pharma Raise Cash?

While Evgen Pharma 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. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash to drive growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Since it has a market capitalisation of UK£8.8m, Evgen Pharma's UK£2.5m in cash burn equates to about 28% of its market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

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

On this analysis of Evgen Pharma's cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Evgen Pharma's situation. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Evgen Pharma CEO is paid..

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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