Here's Why We're Not At All Concerned With Advagene Biopharma's (GTSM:6709) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. 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.

So, the natural question for Advagene Biopharma (GTSM:6709) shareholders is whether they should be concerned by its rate of 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Advagene Biopharma

How Long Is Advagene Biopharma's 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 June 2020, Advagene Biopharma had cash of NT$214m and no debt. Importantly, its cash burn was NT$21m over the trailing twelve months. So it had a very long cash runway of many years from June 2020. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. You can see how its cash balance has changed over time in the image below.

How Is Advagene Biopharma's Cash Burn Changing Over Time?

Advagene Biopharma didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. The 57% reduction in its cash burn over the last twelve months may be good for protecting the balance sheet but it hardly points to imminent growth. Advagene Biopharma 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 Advagene Biopharma To Raise More Cash For Growth?

While we're comforted by the recent reduction evident from our analysis of Advagene Biopharma's cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. 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.

Advagene Biopharma's cash burn of NT$21m is about 1.3% of its NT$1.6b market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

Is Advagene Biopharma's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Advagene Biopharma is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. And even its cash burn reduction was very encouraging. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. On another note, Advagene Biopharma has 2 warning signs (and 1 which can't be ignored) we think you should know about.

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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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