Stock Analysis

Companies Like Clover Biopharmaceuticals (HKG:2197) Are In A Position To Invest In Growth

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There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Clover Biopharmaceuticals (HKG:2197) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Clover Biopharmaceuticals

How Long Is Clover Biopharmaceuticals' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Clover Biopharmaceuticals last reported its balance sheet in June 2022, it had zero debt and cash worth CN¥2.3b. In the last year, its cash burn was CN¥1.1b. Therefore, from June 2022 it had 2.0 years of cash runway. Notably, however, analysts think that Clover Biopharmaceuticals will break even (at a free cash flow level) before then. If that happens, then the length of its cash runway, today, would become a moot point. You can see how its cash balance has changed over time in the image below.

SEHK:2197 Debt to Equity History March 17th 2023

How Is Clover Biopharmaceuticals' Cash Burn Changing Over Time?

Clover Biopharmaceuticals didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Remarkably, it actually increased its cash burn by 261% in the last year. Given that sharp increase in spending, the company's cash runway will shrink rapidly as it depletes its cash reserves. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Hard Would It Be For Clover Biopharmaceuticals To Raise More Cash For Growth?

Given its cash burn trajectory, Clover Biopharmaceuticals shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Since it has a market capitalisation of CN¥2.3b, Clover Biopharmaceuticals' CN¥1.1b in cash burn equates to about 50% of its 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 Clover Biopharmaceuticals' Cash Burn A Worry?

On this analysis of Clover Biopharmaceuticals' cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Clover Biopharmaceuticals' situation. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Clover Biopharmaceuticals (of which 1 is concerning!) you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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