Just because a business does not make any money, does not mean that the stock will go down. Indeed, VistaGen Therapeutics (NASDAQ:VTGN) stock is up 421% 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 VistaGen Therapeutics' cash burn is. 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.
How Long Is VistaGen Therapeutics' Cash Runway?
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. VistaGen Therapeutics has such a small amount of debt that we'll set it aside, and focus on the US$104m in cash it held at December 2020. Looking at the last year, the company burnt through US$9.6m. So it had a very long cash runway of many years from December 2020. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.
How Is VistaGen Therapeutics' Cash Burn Changing Over Time?
Whilst it's great to see that VistaGen Therapeutics has already begun generating revenue from operations, last year it only produced US$648k, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. Even though it doesn't get us excited, the 42% reduction in cash burn year on year does suggest the company can continue operating for quite some time. While the past is always worth studying, it is the future that matters most of all. 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 VistaGen Therapeutics To Raise More Cash For Growth?
While VistaGen Therapeutics 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. 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$458m, VistaGen Therapeutics' US$9.6m in cash burn equates to about 2.1% of its market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.
How Risky Is VistaGen Therapeutics' Cash Burn Situation?
As you can probably tell by now, we're not too worried about VistaGen Therapeutics' cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. And even though its cash burn reduction wasn't quite as impressive, it was still a positive. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for VistaGen Therapeutics (2 are significant!) that you should be aware of before investing here.
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What are the risks and opportunities for VistaGen Therapeutics?
Earnings are forecast to grow 66.16% per year
Has less than 1 year of cash runway
Highly volatile share price over the past 3 months
Makes less than USD$1m in revenue ($-186K)
Does not have a meaningful market cap ($47M)
Shareholders have been diluted in the past year
This article by Simply Wall St is general in nature. 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.
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VistaGen Therapeutics, Inc., a clinical-stage biopharmaceutical company, engages in developing and commercializing various medicines with the potential to care for anxiety, depression, and other disorders of the central nervous system (CNS).
High growth potential with adequate balance sheet.