We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So, the natural question for TOT BIOPHARM International (HKG:1875) 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
When Might TOT BIOPHARM International Run Out Of Money?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at June 2020, TOT BIOPHARM International had cash of CN¥355m and no debt. Importantly, its cash burn was CN¥282m over the trailing twelve months. So it had a cash runway of approximately 15 months from June 2020. Importantly, analysts think that TOT BIOPHARM International will reach cashflow breakeven in 3 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. Depicted below, you can see how its cash holdings have changed over time.
How Well Is TOT BIOPHARM International Growing?
Some investors might find it troubling that TOT BIOPHARM International is actually increasing its cash burn, which is up 3.9% in the last year. Also concerning, operating revenue was actually down by 14% in that time. Considering both these factors, we're not particularly excited by its growth profile. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Hard Would It Be For TOT BIOPHARM International To Raise More Cash For Growth?
TOT BIOPHARM International seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. 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.
TOT BIOPHARM International's cash burn of CN¥282m is about 13% of its CN¥2.1b market capitalisation. 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.
So, Should We Worry About TOT BIOPHARM International's Cash Burn?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought TOT BIOPHARM International's cash burn relative to its market cap was relatively promising. One real positive is that analysts are forecasting that the company will reach breakeven. 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. On another note, we conducted an in-depth investigation of the company, and identified 2 warning signs for TOT BIOPHARM International (1 can't be ignored!) that you should be aware of before investing here.
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