We Think Cocrystal Pharma (NASDAQ:COCP) Needs To Drive Business Growth Carefully

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. Indeed, Cocrystal Pharma (NASDAQ:COCP) stock is up 128% in the last year, providing strong gains for shareholders. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So notwithstanding the buoyant share price, we think it's well worth asking whether Cocrystal Pharma's cash burn is too risky. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Cocrystal Pharma

When Might Cocrystal Pharma Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2020, Cocrystal Pharma had cash of US$33m and no debt. Importantly, its cash burn was US$10m over the trailing twelve months. That means it had a cash runway of about 3.3 years as of December 2020. 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.

How Well Is Cocrystal Pharma Growing?

It was quite stunning to see that Cocrystal Pharma increased its cash burn by 474% over the last year. That's pretty alarming given that operating revenue dropped 69% over the last year, though the business is likely attempting a strategic pivot. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

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.

Cocrystal Pharma has a market capitalisation of US$89m and burnt through US$10m last year, which is 11% of the company's 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 Cocrystal Pharma's Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Cocrystal Pharma's cash runway was relatively promising. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 5 warning signs for Cocrystal Pharma that investors should know when investing in the stock.

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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