Stock Analysis

We're Hopeful That Diffusion Pharmaceuticals (NASDAQ:DFFN) Will Use Its Cash Wisely

  •  Updated
NasdaqCM:DFFN
Source: Shutterstock

We can readily understand why investors are attracted to unprofitable companies. By way of example, Diffusion Pharmaceuticals (NASDAQ:DFFN) has seen its share price rise 124% over the last year, delighting many shareholders. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

In light of its strong share price run, we think now is a good time to investigate how risky Diffusion 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Diffusion Pharmaceuticals

Does Diffusion Pharmaceuticals Have A Long 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 September 2020, Diffusion Pharmaceuticals had cash of US$22m and no debt. In the last year, its cash burn was US$13m. That means it had a cash runway of around 21 months as of September 2020. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
NasdaqCM:DFFN Debt to Equity History March 8th 2021

How Is Diffusion Pharmaceuticals' Cash Burn Changing Over Time?

Diffusion 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 21% in the last year, it seems that the company is ratcheting up investment in the business over time. 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. 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 Diffusion Pharmaceuticals To Raise More Cash For Growth?

Given its cash burn trajectory, Diffusion Pharmaceuticals shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. 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 comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Since it has a market capitalisation of US$91m, Diffusion Pharmaceuticals' US$13m in cash burn equates to about 14% of its 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 Diffusion Pharmaceuticals' Cash Burn?

On this analysis of Diffusion Pharmaceuticals' cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Taking a deeper dive, we've spotted 5 warning signs for Diffusion Pharmaceuticals you should be aware of, and 2 of them are a bit concerning.

Of course Diffusion 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.

When trading Diffusion Pharmaceuticals or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted


Valuation is complex, but we're helping make it simple.

Find out whether Diffusion Pharmaceuticals is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis