We're Hopeful That Medigen Vaccine Biologics (GTSM:6547) Will Use Its Cash Wisely

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, Medigen Vaccine Biologics (GTSM:6547) shareholders have done very well over the last year, with the share price soaring by 573%. 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 Medigen Vaccine Biologics' cash burn is too risky. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Medigen Vaccine Biologics

When Might Medigen Vaccine Biologics Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2020, Medigen Vaccine Biologics had cash of NT$1.7b and no debt. Importantly, its cash burn was NT$649m over the trailing twelve months. So it had a cash runway of about 2.7 years from December 2020. Arguably, that's a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.

How Is Medigen Vaccine Biologics' Cash Burn Changing Over Time?

In our view, Medigen Vaccine Biologics doesn't yet produce significant amounts of operating revenue, since it reported just NT$12m in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Over the last year its cash burn actually increased by 38%, which suggests that management are increasing investment in future growth, but not too quickly. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. Medigen Vaccine Biologics 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 Easily Can Medigen Vaccine Biologics Raise Cash?

Given its cash burn trajectory, Medigen Vaccine Biologics shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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).

Medigen Vaccine Biologics' cash burn of NT$649m is about 1.0% of its NT$63b market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

How Risky Is Medigen Vaccine Biologics' Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Medigen Vaccine Biologics is burning through its cash. In particular, we think its cash burn relative to its market cap 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. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Medigen Vaccine Biologics (of which 2 are potentially serious!) 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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