Companies Like CollPlant Biotechnologies (NASDAQ:CLGN) Are In A Position To Invest In Growth

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for CollPlant Biotechnologies (NASDAQ:CLGN) shareholders is whether they should be concerned by its rate of cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Our analysis indicates that CLGN is potentially overvalued!

How Long Is CollPlant Biotechnologies' 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 2022, CollPlant Biotechnologies had cash of US$36m and no debt. Looking at the last year, the company burnt through US$14m. Therefore, from June 2022 it had 2.5 years of cash runway. Arguably, that's a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.

Can CollPlant Biotechnologies Raise More Cash Easily?

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.

CollPlant Biotechnologies has a market capitalisation of US$60m and burnt through US$14m last year, which is 24% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

How Risky Is CollPlant Biotechnologies' Cash Burn Situation?

Given it's an early stage company, we don't have a lot of data with which to judge CollPlant Biotechnologies' cash burn. Having said that, we can say that its cash runway was a real positive. The bottom line is that we think its cash burn seems fairly reasonable, given it is still chasing growth. Taking a deeper dive, we've spotted 3 warning signs for CollPlant Biotechnologies you should be aware of, and 1 of them is a bit unpleasant.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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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.