Is Cesca Therapeutics Inc (NASDAQ:KOOL) Growing Too Fast?

Trailing twelve-month data shows us that Cesca Therapeutics Inc’s (NASDAQ:KOOL) earnings loss has accumulated to -US$9.00M. Although some investors expected this, their belief in the path to profitability for Cesca Therapeutics may be wavering. The single most important question to ask when you’re investing in a loss-making company is – will they need to raise cash again, and if so, when? Additional cash raising may dilute the value of your shares, and since Cesca Therapeutics is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined Cesca Therapeutics’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital. See our latest analysis for Cesca Therapeutics

What is cash burn?

Cash burn is when a loss-making company spends its equity to fund its expenses before making money from its day-to-day business. Currently, Cesca Therapeutics has US$2.46M in cash holdings and producing negative cash flows from its day-to-day activities of -US$6.66M. How fast Cesca Therapeutics runs down its cash supply over time is known as the cash burn rate. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Unprofitable companies operating in the high-growth healthcare industry often face this problem, and Cesca Therapeutics is no exception. These businesses operate in a highly competitive environment and face running down its cash holdings too fast in order to keep up with innovation.

NasdaqCM:KOOL Income Statement Mar 12th 18
NasdaqCM:KOOL Income Statement Mar 12th 18

When will Cesca Therapeutics need to raise more cash?

Operational expenses, or opex for short, are the bare minimum expenses for Cesca Therapeutics to continue its operations. In this case I’ve only accounted for sales, general and admin (SG&A) expenses, and basic R&D expenses incurred within this year. Opex (excluding one-offs) grew by 3.69% over the past year, which is relatively reasonable for a small-cap company. However, if Cesca Therapeutics continues to grow its opex at this rate, given how much money it currently has in the bank, it will actually need to raise capital again in within the next 2 months! Furthermore, even if Cesca Therapeutics kept its opex level at the current US$12.82M, it will still be coming to market in the next couple of months. Although this is a relatively simplistic calculation, and Cesca Therapeutics may reduce its costs or raise debt capital instead of coming to equity markets, the analysis still helps us understand how sustainable the Cesca Therapeutics’s operation is, and when things may have to change.

Next Steps:

The risks involved in investing in loss-making Cesca Therapeutics means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. The cash burn analysis result indicates a cash constraint for the company, due to its current opex growth rate and its level of cash reserves. An opportunity may exist for you to enter into the stock at an attractive price, should Cesca Therapeutics come to market to fund its operations. This is only a rough assessment of financial health, and I’m sure KOOL has company-specific issues impacting its cash management decisions. I recommend you continue to research Cesca Therapeutics to get a more holistic view of the company by looking at:
  1. Historical Performance: What has KOOL’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Cesca Therapeutics’s board and the CEO’s back ground.
  3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 30 September 2017. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.