Just because a business does not make any money, does not mean that the stock will go down. 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.
Given this risk, we thought we'd take a look at whether Pacific Edge (NZSE:PEB) shareholders should be worried about its 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Does Pacific Edge Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Pacific Edge last reported its balance sheet in March 2022, it had zero debt and cash worth NZ$105m. In the last year, its cash burn was NZ$19m. That means it had a cash runway of about 5.6 years as of March 2022. Importantly, though, analysts think that Pacific Edge will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. The image below shows how its cash balance has been changing over the last few years.
How Well Is Pacific Edge Growing?
At first glance it's a bit worrying to see that Pacific Edge actually boosted its cash burn by 34%, year on year. The silver lining is that revenue was up 49%, showing the business is growing at the top line. We think it is growing rather well, upon reflection. 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 Easily Can Pacific Edge Raise Cash?
There's no doubt Pacific Edge seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.
Pacific Edge has a market capitalisation of NZ$575m and burnt through NZ$19m last year, which is 3.2% of the company's market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
Is Pacific Edge's Cash Burn A Worry?
It may already be apparent to you that we're relatively comfortable with the way Pacific Edge is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. One real positive is that analysts are forecasting that the company will reach breakeven. 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. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 3 warning signs for Pacific Edge that investors should know when investing in the stock.
Of course Pacific Edge 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.
Pacific Edge Limited, a cancer diagnostic company, researches, develops, and commercializes diagnostic and prognostic tools for the early detection and management of cancers in New Zealand, the United States, Australia, and Singapore.
Flawless balance sheet with limited growth.