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 should CollPlant Biotechnologies (NASDAQ:CLGN) shareholders be worried about its 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Does CollPlant Biotechnologies Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In March 2022, CollPlant Biotechnologies had US$41m in cash, and was debt-free. In the last year, its cash burn was US$14m. Therefore, from March 2022 it had 3.0 years of cash runway. A runway of this length affords the company the time and space it needs to develop the business. You can see how its cash balance has changed over time in the image below.
Is CollPlant Biotechnologies' Revenue Growing?
Given that CollPlant Biotechnologies actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. The bad news for shareholders is that operating revenue actually plummeted 94% in the last year, which is a real concern in our view. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how CollPlant Biotechnologies has developed its business over time by checking this visualization of its revenue and earnings history.
How Hard Would It Be For CollPlant Biotechnologies To Raise More Cash For Growth?
Since its revenue growth is moving in the wrong direction, CollPlant Biotechnologies shareholders may wish to think ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.
Since it has a market capitalisation of US$77m, CollPlant Biotechnologies' US$14m in cash burn equates to about 18% 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.
So, Should We Worry About CollPlant Biotechnologies' Cash Burn?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought CollPlant Biotechnologies' 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 CollPlant Biotechnologies' situation. Taking an in-depth view of risks, we've identified 3 warning signs for CollPlant Biotechnologies that you should be aware of before investing.
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.
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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.
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