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, Citius Pharmaceuticals (NASDAQ:CTXR) stock is up 142% 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.
In light of its strong share price run, we think now is a good time to investigate how risky Citius Pharmaceuticals' cash burn is. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We'll start by comparing its cash burn with its cash reserves in order to calculate 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. As at March 2021, Citius Pharmaceuticals had cash of US$104m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through US$21m. That means it had a cash runway of about 4.9 years as of March 2021. There's no doubt that this is a reassuringly long runway. 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 32% 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.
Can Citius Pharmaceuticals Raise More Cash Easily?
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. Companies can raise capital through either debt or equity. 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.
Since it has a market capitalisation of US$255m, Citius Pharmaceuticals' US$21m in cash burn equates to about 8.3% of its market value. 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.
Is Citius Pharmaceuticals' Cash Burn A Worry?
As you can probably tell by now, we're not too worried about Citius Pharmaceuticals' cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. 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. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Citius Pharmaceuticals (2 are concerning!) that you should be aware of before investing here.
Of course Citius Pharmaceuticals 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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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.