Is Oxford BioDynamics (LON:OBD) In A Good Position To Invest In Growth?

By
Simply Wall St
Published
September 21, 2021
AIM:OBD
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 Oxford BioDynamics (LON:OBD) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Oxford BioDynamics

How Long Is Oxford BioDynamics' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In March 2021, Oxford BioDynamics had UK£8.1m in cash, and was debt-free. Looking at the last year, the company burnt through UK£5.6m. So it had a cash runway of approximately 18 months from March 2021. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
AIM:OBD Debt to Equity History September 21st 2021

How Is Oxford BioDynamics' Cash Burn Changing Over Time?

In the last year, Oxford BioDynamics did book revenue of UK£518k, but its revenue from operations was less, at just UK£518k. We don't think that's enough operating revenue for us to understand too much from revenue growth rates, since the company is growing off a low base. So we'll focus on the cash burn, today. Over the last year its cash burn actually increased by a very significant 71%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. Admittedly, we're a bit cautious of Oxford BioDynamics due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

Can Oxford BioDynamics Raise More Cash Easily?

While Oxford BioDynamics 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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.

Oxford BioDynamics' cash burn of UK£5.6m is about 13% of its UK£42m market capitalisation. 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 Oxford BioDynamics' Cash Burn?

On this analysis of Oxford BioDynamics' cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. 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. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Oxford BioDynamics (of which 2 are potentially serious!) you should know about.

Of course Oxford BioDynamics 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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