We Think Kringle Pharma (TSE:4884) Can Afford To Drive Business Growth

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So, the natural question for Kringle Pharma (TSE:4884) 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 Kringle Pharma

Does Kringle Pharma Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Kringle Pharma last reported its September 2024 balance sheet in November 2024, it had zero debt and cash worth JP¥2.3b. In the last year, its cash burn was JP¥661m. That means it had a cash runway of about 3.5 years as of September 2024. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.

How Is Kringle Pharma's Cash Burn Changing Over Time?

In our view, Kringle Pharma doesn't yet produce significant amounts of operating revenue, since it reported just JP¥80m in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. With cash burn dropping by 4.1% it seems management feel the company is spending enough to advance its business plans at an appropriate pace. Kringle Pharma 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 Kringle Pharma Raise More Cash Easily?

While Kringle Pharma is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. 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. 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 JP¥6.1b, Kringle Pharma's JP¥661m in cash burn equates to about 11% of its 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 Kringle Pharma's Cash Burn Situation?

As you can probably tell by now, we're not too worried about Kringle Pharma's cash burn. For example, we think its cash runway suggests that the company is on a good path. On this analysis its cash burn reduction was its weakest feature, but we are not concerned about it. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Kringle Pharma (3 can't be ignored!) that you should be aware of before investing here.

Of course Kringle Pharma 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 with high insider ownership.

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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.