Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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.
So should DelMar Pharmaceuticals (NASDAQ:DMPI) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
How Long Is DelMar Pharmaceuticals's Cash Runway?
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. When DelMar Pharmaceuticals last reported its balance sheet in September 2019, it had zero debt and cash worth US$8.1m. Importantly, its cash burn was US$6.5m over the trailing twelve months. That means it had a cash runway of around 15 months as of September 2019. Notably, one analyst forecasts that DelMar Pharmaceuticals will break even (at a free cash flow level) in about 5 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. The image below shows how its cash balance has been changing over the last few years.
How Is DelMar Pharmaceuticals's Cash Burn Changing Over Time?
DelMar Pharmaceuticals didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 32% over the last year suggests some degree of prudence. 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.
Can DelMar Pharmaceuticals Raise More Cash Easily?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for DelMar Pharmaceuticals to raise more 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. Commonly, a business will sell new shares in itself to raise cash to drive 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$6.1m, DelMar Pharmaceuticals's US$6.5m in cash burn equates to about 106% of its market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.
Is DelMar Pharmaceuticals's Cash Burn A Worry?
Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought DelMar Pharmaceuticals's cash burn reduction was relatively promising. One real positive is that at least one analyst is forecasting that the company will reach breakeven. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. Notably, our data indicates that DelMar Pharmaceuticals insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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