We can readily understand why investors are attracted to unprofitable companies. Indeed, Champions Oncology (NASDAQ:CSBR) stock is up 178% in the last year, providing strong gains for shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So notwithstanding the buoyant share price, we think it's well worth asking whether Champions Oncology's cash burn is too risky. 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
How Long Is Champions Oncology's 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 Champions Oncology last reported its balance sheet in January 2021, it had zero debt and cash worth US$7.4m. In the last year, its cash burn was US$1.1m. That means it had a cash runway of about 6.7 years as of January 2021. Importantly, though, analysts think that Champions Oncology will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. The image below shows how its cash balance has been changing over the last few years.
How Well Is Champions Oncology Growing?
One thing for shareholders to keep front in mind is that Champions Oncology increased its cash burn by 424% in the last twelve months. On the bright side, at least operating revenue was up 26% over the same period, giving some cause for hope. Taken together, we think these growth metrics are a little worrying. While the past is always worth studying, it is the future that matters most of all. 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 Champions Oncology Raise Cash?
While Champions Oncology 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. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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$167m, Champions Oncology's US$1.1m in cash burn equates to about 0.7% of its market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.
How Risky Is Champions Oncology's Cash Burn Situation?
It may already be apparent to you that we're relatively comfortable with the way Champions Oncology is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 1 warning sign for Champions Oncology that potential shareholders should take into account before putting money into a stock.
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