We're Not Very Worried About Oxford BioDynamics' (LON:OBD) Cash Burn Rate

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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Oxford BioDynamics (LON:OBD) shareholders 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Oxford BioDynamics

When Might Oxford BioDynamics Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Oxford BioDynamics last reported its balance sheet in March 2020, it had zero debt and cash worth UK£14m. Importantly, its cash burn was UK£3.3m over the trailing twelve months. That means it had a cash runway of about 4.2 years as of March 2020. A runway of this length affords the company the time and space it needs to develop the business. The image below shows how its cash balance has been changing over the last few years.

How Is Oxford BioDynamics' Cash Burn Changing Over Time?

In the last year, Oxford BioDynamics did book revenue of UK£521k, but its revenue from operations was less, at just UK£521k. 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. With the cash burn rate up 27% 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. Oxford BioDynamics makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.

Can Oxford BioDynamics Raise More Cash Easily?

Given its cash burn trajectory, Oxford BioDynamics shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

Oxford BioDynamics has a market capitalisation of UK£61m and burnt through UK£3.3m last year, which is 5.4% of the company's market value. 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.

How Risky Is Oxford BioDynamics' Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Oxford BioDynamics is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. On another note, Oxford BioDynamics has 4 warning signs (and 2 which are a bit concerning) we think you should know about.

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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