There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for TaiwanJ Pharmaceuticals (GTSM:6549) shareholders is whether they should be concerned by its rate of 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
How Long Is TaiwanJ Pharmaceuticals' Cash Runway?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. In December 2020, TaiwanJ Pharmaceuticals had NT$93m in cash, and was debt-free. Importantly, its cash burn was NT$43m over the trailing twelve months. Therefore, from December 2020 it had 2.2 years of cash runway. That's decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.
How Easily Can TaiwanJ Pharmaceuticals Raise Cash?
Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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.
TaiwanJ Pharmaceuticals' cash burn of NT$43m is about 3.9% of its NT$1.1b 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.
How Risky Is TaiwanJ Pharmaceuticals' Cash Burn Situation?
Given it's an early stage company, we don't have a lot of data with which to judge TaiwanJ Pharmaceuticals' cash burn. Certainly, we'd be more confident in the stock if it was generating operating revenue. Having said that, we can say that its cash burn relative to its market cap was a real positive. In conclusion, we don't see why investors should be concerned with its cash burn, at least for some time. Separately, we looked at different risks affecting the company and spotted 3 warning signs for TaiwanJ Pharmaceuticals (of which 1 doesn't sit too well with us!) you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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