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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So, the natural question for Citius Pharmaceuticals (NASDAQ:CTXR) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
How Long Is Citius Pharmaceuticals' Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. Citius Pharmaceuticals has such a small amount of debt that we'll set it aside, and focus on the US$14m in cash it held at September 2020. In the last year, its cash burn was US$17m. That means it had a cash runway of around 10 months as of September 2020. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. The image below shows how its cash balance has been changing over the last few years.
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. Over the last year its cash burn actually increased by 36%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Hard Would It Be For Citius Pharmaceuticals To Raise More Cash For Growth?
Since its cash burn is moving in the wrong direction, Citius Pharmaceuticals shareholders may wish to think 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. 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$60m, Citius Pharmaceuticals' US$17m in cash burn equates to about 28% of its market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
How Risky Is Citius Pharmaceuticals' Cash Burn Situation?
We must admit that we don't think Citius Pharmaceuticals is in a very strong position, when it comes to its cash burn. Although we can understand if some shareholders find its cash burn relative to its market cap acceptable, we can't ignore the fact that we consider its cash runway to be downright troublesome. Summing up, we think the Citius Pharmaceuticals' cash burn is a risk, based on the factors we mentioned in this article. Taking a deeper dive, we've spotted 4 warning signs for Citius Pharmaceuticals you should be aware of, and 3 of them are concerning.
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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.