Here's Why We're Watching Ampio Pharmaceuticals' (NYSEMKT:AMPE) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. By way of example, Ampio Pharmaceuticals (NYSEMKT:AMPE) has seen its share price rise 246% over the last year, delighting many shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

In light of its strong share price run, we think now is a good time to investigate how risky Ampio Pharmaceuticals' cash burn is. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Ampio Pharmaceuticals

When Might Ampio Pharmaceuticals 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. As at September 2020, Ampio Pharmaceuticals had cash of US$9.4m and no debt. In the last year, its cash burn was US$17m. So it had a cash runway of approximately 7 months from September 2020. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. The image below shows how its cash balance has been changing over the last few years.

How Is Ampio Pharmaceuticals' Cash Burn Changing Over Time?

Ampio 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 27% 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. 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 Easily Can Ampio Pharmaceuticals Raise Cash?

Given its cash burn trajectory, Ampio Pharmaceuticals shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.

Ampio Pharmaceuticals' cash burn of US$17m is about 3.8% of its US$435m market capitalisation. 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 Ampio Pharmaceuticals' Cash Burn A Worry?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Ampio Pharmaceuticals' cash burn relative to its market cap was relatively promising. Summing up, we think the Ampio Pharmaceuticals' cash burn is a risk, based on the factors we mentioned in this article. On another note, Ampio Pharmaceuticals has 5 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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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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