We're Keeping An Eye On Vistin Pharma's (OB:VISTN) Cash Burn Rate

We can readily understand why investors are attracted to unprofitable companies. For example, Vistin Pharma (OB:VISTN) shareholders have done very well over the last year, with the share price soaring by 271%. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So notwithstanding the buoyant share price, we think it's well worth asking whether Vistin Pharma's cash burn is too risky. 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.

See our latest analysis for Vistin Pharma

Does Vistin Pharma Have A Long Cash Runway?

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. Vistin Pharma has such a small amount of debt that we'll set it aside, and focus on the kr98m in cash it held at September 2020. In the last year, its cash burn was kr151m. That means it had a cash runway of around 8 months as of September 2020. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. You can see how its cash balance has changed over time in the image below.

How Well Is Vistin Pharma Growing?

One thing for shareholders to keep front in mind is that Vistin Pharma increased its cash burn by 992% in the last twelve months. While operating revenue was up over the same period, the 16% gain gives us scant comfort. Taken together, we think these growth metrics are a little worrying. In reality, this article only makes a short study of the company's growth data. You can take a look at how Vistin Pharma has developed its business over time by checking this visualization of its revenue and earnings history.

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

Given the trajectory of Vistin Pharma's cash burn, many investors will already be thinking about how it might raise more cash in the future. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Since it has a market capitalisation of kr1.1b, Vistin Pharma's kr151m in cash burn equates to about 14% of its market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

So, Should We Worry About Vistin Pharma's Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Vistin Pharma's revenue growth was relatively promising. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. Taking a deeper dive, we've spotted 4 warning signs for Vistin Pharma you should be aware of, and 2 of them shouldn't be ignored.

Of course Vistin 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 that insiders are buying.

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