Here's Why We're Not Too Worried About Poolbeg Pharma's (LON:POLB) Cash Burn Situation

July 12, 2022
  •  Updated
October 30, 2022
AIM:POLB
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Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. 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 Poolbeg Pharma (LON:POLB) 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.

Check out our latest analysis for Poolbeg Pharma

Does Poolbeg Pharma Have A Long Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Poolbeg Pharma last reported its balance sheet in December 2021, it had zero debt and cash worth UK£21m. Looking at the last year, the company burnt through UK£3.0m. So it had a cash runway of about 7.1 years from December 2021. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
AIM:POLB Debt to Equity History July 12th 2022

How Hard Would It Be For Poolbeg Pharma To Raise More Cash For Growth?

Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Poolbeg Pharma has a market capitalisation of UK£24m and burnt through UK£3.0m last year, which is 13% of the company's market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

How Risky Is Poolbeg Pharma's Cash Burn Situation?

Given it's an early stage company, we don't have a lot of data with which to judge Poolbeg Pharma's cash burn. Certainly, we'd be more confident in the stock if it was generating operating revenue. However, it is fair to say that its cash runway gave us comfort. Overall, we don't think shareholders need to be worried about its cash burn in the near term. On another note, we conducted an in-depth investigation of the company, and identified 6 warning signs for Poolbeg Pharma (2 are a bit concerning!) that you should be aware of before investing here.

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