Stock Analysis

Companies Like Capricor Therapeutics (NASDAQ:CAPR) Are In A Position To Invest In Growth

NasdaqCM:CAPR
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We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given this risk, we thought we'd take a look at whether Capricor Therapeutics (NASDAQ:CAPR) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Capricor Therapeutics

Does Capricor Therapeutics Have A Long 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. When Capricor Therapeutics last reported its balance sheet in September 2021, it had zero debt and cash worth US$41m. Looking at the last year, the company burnt through US$16m. So it had a cash runway of about 2.5 years from September 2021. That's decent, giving the company a couple years to develop its business. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
NasdaqCM:CAPR Debt to Equity History February 1st 2022

How Is Capricor Therapeutics' Cash Burn Changing Over Time?

In our view, Capricor Therapeutics doesn't yet produce significant amounts of operating revenue, since it reported just US$303k in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. Over the last year its cash burn actually increased by a very significant 95%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

Can Capricor Therapeutics Raise More Cash Easily?

Given its cash burn trajectory, Capricor Therapeutics shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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 US$86m, Capricor Therapeutics' US$16m in cash burn equates to about 19% of its market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

So, Should We Worry About Capricor Therapeutics' Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Capricor Therapeutics' cash runway was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Capricor Therapeutics' situation. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Capricor Therapeutics (1 is concerning!) that you should be aware of before investing here.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Capricor Therapeutics is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.