Is Cocrystal Pharma (NASDAQ:COCP) In A Good Position To Invest In Growth?

Just because a business does not make any money, does not mean that the stock will go down. By way of example, Cocrystal Pharma (NASDAQ:COCP) has seen its share price rise 277% over the last year, delighting many shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given its strong share price performance, we think it's worthwhile for Cocrystal Pharma shareholders to consider whether its cash burn is concerning. 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 Cocrystal Pharma

When Might Cocrystal Pharma Run Out Of Money?

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. In September 2020, Cocrystal Pharma had US$32m in cash, and was debt-free. Importantly, its cash burn was US$8.9m over the trailing twelve months. So it had a cash runway of about 3.6 years from September 2020. A runway of this length affords the company the time and space it needs to develop the business. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Cocrystal Pharma Growing?

One thing for shareholders to keep front in mind is that Cocrystal Pharma increased its cash burn by 263% in the last twelve months. And that is all the more of a concern in light of the fact that operating revenue was actually down by 69% in the last year, as the company no doubt scrambles to change its fortunes. Considering these two factors together makes us nervous about the direction the company seems to be heading. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Easily Can Cocrystal Pharma Raise Cash?

While Cocrystal Pharma seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. 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. 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$106m, Cocrystal Pharma's US$8.9m in cash burn equates to about 8.4% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

So, Should We Worry About Cocrystal Pharma's Cash Burn?

On this analysis of Cocrystal Pharma's cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. 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 Cocrystal Pharma's situation. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Cocrystal Pharma (of which 1 makes us a bit uncomfortable!) you should know about.

Of course Cocrystal Pharma 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. 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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