We Think HCW Biologics (NASDAQ:HCWB) Can Afford To Drive Business Growth

By
Simply Wall St
Published
March 17, 2022
NasdaqGM:HCWB
Source: Shutterstock

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, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for HCW Biologics (NASDAQ:HCWB) shareholders is whether they should be concerned by its rate of cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for HCW Biologics

When Might HCW Biologics Run Out Of Money?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In September 2021, HCW Biologics had US$40m in cash, and was debt-free. Importantly, its cash burn was US$11m over the trailing twelve months. Therefore, from September 2021 it had 3.6 years of cash runway. A runway of this length affords the company the time and space it needs to develop the business. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
NasdaqGM:HCWB Debt to Equity History March 17th 2022

How Well Is HCW Biologics Growing?

At first glance it's a bit worrying to see that HCW Biologics actually boosted its cash burn by 12%, year on year. In light of that, the flat year on year operating leverage is a bit off-putting. In light of the data above, we're fairly sanguine about the business growth trajectory. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Easily Can HCW Biologics Raise Cash?

While HCW Biologics 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.

HCW Biologics' cash burn of US$11m is about 16% of its US$69m market capitalisation. 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 HCW Biologics' Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought HCW Biologics' cash runway was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about HCW Biologics' situation. An in-depth examination of risks revealed 3 warning signs for HCW Biologics that readers should think about before committing capital to this stock.

Of course HCW Biologics 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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