Equillium, Inc. (NASDAQ:EQ) continues its loss-making streak, announcing negative earnings for its latest financial year ending. The single most important question to ask when you’re investing in a loss-making company is – will it need to raise cash again, and if so, when? Selling new shares may dilute the value of existing shares on issue, and since Equillium is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Looking at Equillium’s latest financial data, I will estimate when the company may run out of cash and need to raise more money.
What is cash burn?
Equillium currently has US$57m in the bank, with negative free cash flow of -US$14.8m. The riskiest factor facing investors of Equillium is the potential for the company to run out of cash without the ability to raise more money. Furthermore, it is not uncommon to find loss-makers in an industry such as biotech. These businesses operate in a highly competitive environment and face running down its cash holdings too fast in order to keep up with innovation.
When will Equillium need to raise more cash?
We can measure Equillium's ongoing cash expenditure requirements by looking at free cash flow, which I define as cash flow from operations minus fixed capital investment, is a measure of how much cash a company generates/loses each year.
In Equillium’s case, its cash outflows fell by 119% last year, which may signal the company moving towards a more sustainable level of expenses. If Equillium kept its cash burn rate at -US$14.8m, it may not need to raise capital for another couple of years. Even though this is analysis is fairly basic, and Equillium still can cut its overhead further, or borrow money instead of raising new equity capital, the outcome of this analysis still helps us understand how sustainable the Equillium operation is, and when things may have to change.
This analysis isn’t meant to deter you from Equillium, but rather, to help you better understand the risks involved investing in loss-making companies. The outcome of my analysis suggests that if the company maintains this negative rate of cash burn growth, it will run out of cash in the upcoming years. This suggests an opportunity to enter into the stock, potentially at an attractive price, should Equillium raise capital to fund its growth. This is only a rough assessment of financial health, and EQ likely also has company-specific issues impacting its cash management decisions. I suggest you continue to research Equillium to get a more holistic view of the company by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EQ’s future growth? Take a look at our free research report of analyst consensus for EQ’s outlook.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Equillium’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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