Trailing twelve-month data shows us that Galmed Pharmaceuticals Ltd.'s (NASDAQ:GLMD) earnings loss has accumulated to -US$12.3m. Although some investors expected this, their belief in the path to profitability for Galmed Pharmaceuticals may be wavering. A crucial question to bear in mind when you’re an investor of an unprofitable business, is whether the company will have to raise more capital in the near future. Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to raise further funds. This may not always be on good terms, which could hurt current shareholders if the new deal lowers the value of their shares. Today I’ve examined Galmed Pharmaceuticals’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital.
What is cash burn?
With a negative free cash flow of -US$11.2m, Galmed Pharmaceuticals is chipping away at its US$84m cash reserves in order to run its business. The riskiest factor facing investors of Galmed Pharmaceuticals is the potential for the company to run out of cash without the ability to raise more money. Not surprisingly, it is more common to find unprofitable companies in the high-growth biotech industry. The industry is highly competitive, with companies racing to innovate at the risk of burning through their cash too fast.
When will Galmed Pharmaceuticals need to raise more cash?
One way to measure the cost to Galmed Pharmaceuticals of keeping the business running, is by using free cash flow (which I define as cash flow from operations minus fixed capital investment).
Over the last twelve months, free cash outflows increased by 7.0%, which is relatively appropriate for a small-cap company. However, according to my analysis, if Galmed Pharmaceuticals continues to grow at this rate, it will burn through its cash reserves by the next 1.8 years, and may be coming to market again. Not the best news for shareholders. However, if the company does not increase its cash burn next year and remains at the current level of -US$11.2m, then it should not need to raise further capital for the next few years. Even though this is analysis is fairly basic, and Galmed Pharmaceuticals still can cut its overhead in the near future, or open a new line of credit instead of issuing new shares, this analysis still helps us understand how sustainable the Galmed Pharmaceuticals operation is, and when things may have to change.
The risks involved in investing in loss-making Galmed Pharmaceuticals means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. The cash burn analysis result indicates a cash constraint for the company, due to its current cash burn growth rate and its level of cash reserves. The potential equity raising resulting from this means you could potentially get a better deal on the share price when the company raises capital next. This is only a rough assessment of financial health, and GLMD likely also has company-specific issues impacting its cash management decisions. I recommend you continue to research Galmed Pharmaceuticals to get a better picture of the company by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GLMD’s future growth? Take a look at our free research report of analyst consensus for GLMD’s outlook.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Galmed Pharmaceuticals’s board and the CEO’s back ground.
- 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 30 June 2019. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.
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