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Just because a business does not make any money, does not mean that the stock will go down. Indeed, Biomerica (NASDAQ:BMRA) stock is up 173% in the last year, providing strong gains for shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given its strong share price performance, we think it's worthwhile for Biomerica shareholders to consider whether its cash burn is concerning. 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.
Does Biomerica Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Biomerica last reported its balance sheet in February 2020, it had zero debt and cash worth US$2.4m. Looking at the last year, the company burnt through US$1.9m. Therefore, from February 2020 it had roughly 15 months of cash runway. Importantly, though, analysts think that Biomerica will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.
How Well Is Biomerica Growing?
Some investors might find it troubling that Biomerica is actually increasing its cash burn, which is up 7.4% in the last 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. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Easily Can Biomerica Raise Cash?
While Biomerica 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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).
Biomerica has a market capitalisation of US$92m and burnt through US$1.9m last year, which is 2.1% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
So, Should We Worry About Biomerica's Cash Burn?
As you can probably tell by now, we're not too worried about Biomerica's cash burn. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 3 warning signs for Biomerica that investors should know when investing in the stock.
Of course Biomerica 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.
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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