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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given this risk, we thought we'd take a look at whether Energenesis BiomedicalLTD (GTSM:6657) shareholders should be worried about its cash burn. 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.
How Long Is Energenesis BiomedicalLTD's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2020, Energenesis BiomedicalLTD had cash of NT$544m and no debt. Importantly, its cash burn was NT$102m over the trailing twelve months. So it had a cash runway of about 5.4 years from December 2020. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. Depicted below, you can see how its cash holdings have changed over time.
How Is Energenesis BiomedicalLTD's Cash Burn Changing Over Time?
Whilst it's great to see that Energenesis BiomedicalLTD has already begun generating revenue from operations, last year it only produced NT$7.1m, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. With cash burn dropping by 17% it seems management feel the company is spending enough to advance its business plans at an appropriate pace. Energenesis BiomedicalLTD 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 Energenesis BiomedicalLTD Raise Cash?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Energenesis BiomedicalLTD to raise more cash in the future. 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. 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.
Since it has a market capitalisation of NT$3.5b, Energenesis BiomedicalLTD's NT$102m in cash burn equates to about 2.9% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
So, Should We Worry About Energenesis BiomedicalLTD's Cash Burn?
As you can probably tell by now, we're not too worried about Energenesis BiomedicalLTD's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Its weak point is its cash burn reduction, but even that wasn't too bad! After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Energenesis BiomedicalLTD (of which 2 are a bit unpleasant!) 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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