Here's Why Midatech Pharma (LON:MTPH) Must Use Its Cash Wisely

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given this risk, we thought we'd take a look at whether Midatech Pharma (LON:MTPH) shareholders should be worried about its 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). Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Midatech Pharma

How Long Is Midatech Pharma's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. Midatech Pharma has such a small amount of debt that we'll set it aside, and focus on the UK£7.5m in cash it held at December 2020. Looking at the last year, the company burnt through UK£9.5m. So it had a cash runway of approximately 10 months from December 2020. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.

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

Although Midatech Pharma had revenue of UK£343k in the last twelve months, its operating revenue was only UK£343k in that time period. Given how low that operating leverage is, we think it's too early to put much weight on the revenue growth, so we'll focus on how the cash burn is changing, instead. With the cash burn rate up 39% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. Admittedly, we're a bit cautious of Midatech Pharma due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.

Can Midatech Pharma Raise More Cash Easily?

Since its cash burn is moving in the wrong direction, Midatech Pharma shareholders may wish to think ahead to when the company may need to raise more cash. 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. 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.

Midatech Pharma has a market capitalisation of UK£17m and burnt through UK£9.5m last year, which is 55% of the company's market value. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).

Is Midatech Pharma's Cash Burn A Worry?

Midatech Pharma is not in a great position when it comes to its cash burn situation. Although we can understand if some shareholders find its increasing cash burn acceptable, we can't ignore the fact that we consider its cash burn relative to its market cap to be downright troublesome. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. Taking a deeper dive, we've spotted 6 warning signs for Midatech Pharma you should be aware of, and 4 of them make us uncomfortable.

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.

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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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