There's no doubt that money can be made by owning shares of unprofitable businesses. By way of example, Citius Pharmaceuticals (NASDAQ:CTXR) has seen its share price rise 131% over the last year, delighting many shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So notwithstanding the buoyant share price, we think it's well worth asking whether Citius Pharmaceuticals' cash burn is too risky. 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.
When Might Citius Pharmaceuticals Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2021, Citius Pharmaceuticals had cash of US$116m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was US$22m. Therefore, from June 2021 it had 5.3 years of cash runway. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. Depicted below, you can see how its cash holdings have changed over time.
How Is Citius Pharmaceuticals' Cash Burn Changing Over Time?
Citius Pharmaceuticals didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. With the cash burn rate up 34% in the last year, it seems that the company is ratcheting up investment in the business over time. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. 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 Hard Would It Be For Citius Pharmaceuticals To Raise More Cash For Growth?
While Citius Pharmaceuticals does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.
Citius Pharmaceuticals' cash burn of US$22m is about 6.9% of its US$320m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
So, Should We Worry About Citius Pharmaceuticals' Cash Burn?
As you can probably tell by now, we're not too worried about Citius Pharmaceuticals' cash burn. For example, we think its cash runway suggests that the company is on a good path. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Taking a deeper dive, we've spotted 3 warning signs for Citius Pharmaceuticals you should be aware of, and 2 of them are potentially serious.
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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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Citius Pharmaceuticals, Inc., a late-stage pharmaceutical company, engages in the development and commercialization of critical care products focusing on oncology products, anti-infectives products in adjunct cancer care, prescription products, and stem cell therapy.
Flawless balance sheet with moderate growth potential.