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.
Given this risk, we thought we'd take a look at whether Corline Biomedical (STO:CLBIO) 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'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
How Long Is Corline Biomedical's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2020, Corline Biomedical had cash of kr9.0m and no debt. Looking at the last year, the company burnt through kr14m. That means it had a cash runway of around 8 months as of December 2020. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Corline Biomedical Growing?
We reckon the fact that Corline Biomedical managed to shrink its cash burn by 26% over the last year is rather encouraging. And considering that its operating revenue gained 26% during that period, that's great to see. We think it is growing rather well, upon reflection. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Corline Biomedical is building its business over time.
How Hard Would It Be For Corline Biomedical To Raise More Cash For Growth?
Given Corline Biomedical's revenue is receding, there's a considerable chance it will eventually need to raise more money to spend on driving growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.
Corline Biomedical's cash burn of kr14m is about 5.4% of its kr255m market capitalisation. 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.
So, Should We Worry About Corline Biomedical's Cash Burn?
On this analysis of Corline Biomedical's cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway has us a bit worried. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Corline Biomedical (2 are concerning!) that you should be aware of before investing here.
Of course Corline Biomedical 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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