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Should You Buy 4D pharma plc (LON:DDDD) For This Reason?

Simply Wall St

4D pharma plc (LON:DDDD) continues its loss-making streak, announcing negative earnings for its latest financial year ending. Savvy investors should always reassess the situation of loss-making companies frequently, and keep informed about whether or not these businesses are in a strong cash position. Selling new shares may dilute the value of existing shares on issue, and since 4D pharma is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined 4D pharma’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital.

View our latest analysis for 4D pharma

What is cash burn?

With a negative free cash flow of -UK£23.5m, 4D pharma is chipping away at its UK£26m cash reserves in order to run its business. The biggest threat facing 4D pharma investors is the company going out of business when it runs out of money and cannot raise any more capital. Unprofitable companies operating in the high-growth pharma industry often face this problem, and 4D pharma is no exception. The industry is highly competitive, with companies racing to innovate at the risk of burning through their cash too fast.

AIM:DDDD Income Statement, September 19th 2019

When will 4D pharma need to raise more cash?

One way to measure the cost to 4D pharma of keeping the business running, is by using free cash flow (which I define as cash flow from operations minus fixed capital investment).

Free cash outflows declined by 26% over the past year, which could be an indication of 4D pharma putting the brakes on ramping up high growth. Though, if the company kept its cash burn level at -UK£23.5m, it may not need to raise capital for another 1.1 years. Even though this is analysis is fairly basic, and 4D pharma still can cut its overhead further, or open a new line of credit instead of issuing new shares, the outcome of this analysis still helps us understand how sustainable the 4D pharma operation is, and when things may have to change.

Next Steps:

This analysis isn’t meant to deter you from 4D pharma, but rather, to help you better understand the risks involved investing in loss-making companies. The cash burn analysis result indicates a cash constraint for the company, due to its current level of cash reserves. An opportunity may exist for you to enter into the stock at an attractive price, should 4D pharma be required to raise new funds to continue operating. This is only a rough assessment of financial health, and DDDD likely also has company-specific issues impacting its cash management decisions. I recommend you continue to research 4D pharma to get a better picture of the company by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for DDDD’s future growth? Take a look at our free research report of analyst consensus for DDDD’s outlook.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on 4D pharma’s board and the CEO’s back ground.
  3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.

NB: Figures in this article are calculated using data from the trailing twelve months from 31 December 2018. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.