Stock Analysis

We're Hopeful That Organovo Holdings (NASDAQ:ONVO) Will Use Its Cash Wisely

NasdaqCM:ONVO
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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 software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given this risk, we thought we'd take a look at whether Organovo Holdings (NASDAQ:ONVO) shareholders should be worried about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Organovo Holdings

When Might Organovo Holdings Run Out Of Money?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. In September 2021, Organovo Holdings had US$34m in cash, and was debt-free. Importantly, its cash burn was US$7.8m over the trailing twelve months. That means it had a cash runway of about 4.3 years as of September 2021. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
NasdaqCM:ONVO Debt to Equity History January 4th 2022

How Is Organovo Holdings' Cash Burn Changing Over Time?

Organovo Holdings 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. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 42% over the last year suggests some degree of prudence. Admittedly, we're a bit cautious of Organovo Holdings due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Easily Can Organovo Holdings Raise Cash?

While Organovo Holdings is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. 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. 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.

Organovo Holdings has a market capitalisation of US$37m and burnt through US$7.8m last year, which is 21% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

How Risky Is Organovo Holdings' Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Organovo Holdings is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. While its cash burn relative to its market cap wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Organovo Holdings (of which 1 shouldn't be ignored!) you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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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.