Here's Why We're Not Too Worried About Rua Bioscience's (NZSE:RUA) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. 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 Rua Bioscience (NZSE:RUA) shareholders should be worried about its 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.

Check out our latest analysis for Rua Bioscience

Does Rua Bioscience 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. As at December 2020, Rua Bioscience had cash of NZ$19m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through NZ$7.0m. Therefore, from December 2020 it had 2.7 years of cash runway. Arguably, that's a prudent and sensible length of runway to have. Importantly, if we extrapolate recent cash burn trends, the cash runway would be a lot longer. You can see how its cash balance has changed over time in the image below.

How Is Rua Bioscience's Cash Burn Changing Over Time?

While Rua Bioscience did record statutory revenue of NZ$592k over the last year, it didn't have any revenue from operations. That means we consider it a pre-revenue business, and we will focus our growth analysis on cash burn, for now. With the cash burn rate up 26% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. Rua Bioscience makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Hard Would It Be For Rua Bioscience To Raise More Cash For Growth?

While Rua Bioscience does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. 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 looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Rua Bioscience has a market capitalisation of NZ$61m and burnt through NZ$7.0m last year, which is 11% of the company's 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 Rua Bioscience's Cash Burn?

As you can probably tell by now, we're not too worried about Rua Bioscience's cash burn. For example, we think its cash runway suggests that the company is on a good path. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Separately, we looked at different risks affecting the company and spotted 2 warning signs for Rua Bioscience (of which 1 is a bit concerning!) you should know about.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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This article by Simply Wall St is general in nature. 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.
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