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Is Cocrystal Pharma (NASDAQ:COCP) In A Good Position To Invest In Growth?

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, Cocrystal Pharma (NASDAQ:COCP) shareholders have done very well over the last year, with the share price soaring by 112%. 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 Cocrystal Pharma's cash burn is. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Cocrystal Pharma

When Might Cocrystal Pharma Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Cocrystal Pharma last reported its balance sheet in December 2020, it had zero debt and cash worth US$33m. In the last year, its cash burn was US$10m. So it had a cash runway of about 3.3 years from December 2020. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
debt-equity-history-analysis

How Well Is Cocrystal Pharma Growing?

One thing for shareholders to keep front in mind is that Cocrystal Pharma increased its cash burn by 474% in the last twelve months. That's pretty alarming given that operating revenue dropped 69% over the last year, though the business is likely attempting a strategic pivot. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. Clearly, however, the crucial factor is whether the company will grow its business going forward. 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 Cocrystal Pharma Raise Cash?

Even though it seems like Cocrystal Pharma is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. 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.

Since it has a market capitalisation of US$103m, Cocrystal Pharma's US$10m in cash burn equates to about 9.8% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is Cocrystal Pharma's Cash Burn A Worry?

On this analysis of Cocrystal Pharma's cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Cocrystal Pharma's situation. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 4 warning signs for Cocrystal Pharma that potential shareholders should take into account before putting money into a stock.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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