Here's Why We're Not Too Worried About CollPlant Biotechnologies' (NASDAQ:CLGN) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should CollPlant Biotechnologies (NASDAQ:CLGN) shareholders 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for CollPlant Biotechnologies

Does CollPlant Biotechnologies 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 CollPlant Biotechnologies last reported its balance sheet in September 2022, it had zero debt and cash worth US$33m. Looking at the last year, the company burnt through US$14m. That means it had a cash runway of about 2.3 years as of September 2022. That's decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.

Can CollPlant Biotechnologies Raise More Cash Easily?

Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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$112m, CollPlant Biotechnologies' US$14m in cash burn equates to about 13% of its market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

Is CollPlant Biotechnologies' Cash Burn A Worry?

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. On another note, CollPlant Biotechnologies has 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.

Of course CollPlant Biotechnologies may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.