We're Hopeful That Clover Biopharmaceuticals (HKG:2197) Will Use Its Cash Wisely

There's no doubt that money can be made by owning shares of unprofitable businesses. 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 Clover Biopharmaceuticals (HKG:2197) shareholders is whether they should be concerned by its rate of cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Clover Biopharmaceuticals

Does Clover Biopharmaceuticals 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. In December 2021, Clover Biopharmaceuticals had CN¥2.9b in cash, and was debt-free. In the last year, its cash burn was CN¥998m. That means it had a cash runway of about 2.9 years as of December 2021. That's decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.

Can Clover Biopharmaceuticals Raise More Cash Easily?

Companies can raise capital through either debt or equity. 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).

Clover Biopharmaceuticals' cash burn of CN¥998m is about 18% of its CN¥5.5b 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.

Is Clover Biopharmaceuticals' Cash Burn A Worry?

Given it's an early stage company, we don't have a lot of data with which to judge Clover Biopharmaceuticals' cash burn. We would undoubtedly be more comfortable if it had reported some operating revenue. Having said that, we can say that its cash runway was a real positive. The bottom line is that we think its cash burn seems fairly reasonable, given it is still chasing growth. Separately, we looked at different risks affecting the company and spotted 2 warning signs for Clover Biopharmaceuticals (of which 1 is a bit unpleasant!) you should know about.

Of course Clover Biopharmaceuticals 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.