U.S. markets open in 6 hours 17 minutes
  • S&P Futures

    4,254.00
    +8.25 (+0.19%)
     
  • Dow Futures

    34,525.00
    +63.00 (+0.18%)
     
  • Nasdaq Futures

    14,032.25
    +38.00 (+0.27%)
     
  • Russell 2000 Futures

    2,334.90
    +4.40 (+0.19%)
     
  • Crude Oil

    71.36
    +0.45 (+0.63%)
     
  • Gold

    1,863.10
    -16.50 (-0.88%)
     
  • Silver

    27.94
    -0.20 (-0.71%)
     
  • EUR/USD

    1.2104
    -0.0003 (-0.02%)
     
  • 10-Yr Bond

    1.4620
    0.0000 (0.00%)
     
  • Vix

    15.65
    -0.45 (-2.80%)
     
  • GBP/USD

    1.4096
    -0.0021 (-0.15%)
     
  • USD/JPY

    109.6710
    +0.0360 (+0.03%)
     
  • BTC-USD

    39,543.12
    +4,248.69 (+12.04%)
     
  • CMC Crypto 200

    985.58
    +43.77 (+4.65%)
     
  • FTSE 100

    7,134.06
    0.00 (0.00%)
     
  • Nikkei 225

    29,161.80
    +213.07 (+0.74%)
     

ESSA Pharma (CVE:EPI) Is In A Good Position To Deliver On Growth Plans

·4 min read

Just because a business does not make any money, does not mean that the stock will go down. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for ESSA Pharma (CVE:EPI) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business's cash, relative to its cash burn.

View our latest analysis for ESSA Pharma

How Long Is ESSA Pharma'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. As at December 2019, ESSA Pharma had cash of US$46m and no debt. In the last year, its cash burn was US$14m. So it had a cash runway of about 3.3 years from December 2019. A runway of this length affords the company the time and space it needs to develop the business. The image below shows how its cash balance has been changing over the last few years.

TSXV:EPI Historical Debt, March 19th 2020
TSXV:EPI Historical Debt, March 19th 2020

How Is ESSA Pharma's Cash Burn Changing Over Time?

ESSA Pharma didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. With the cash burn rate up 36% in the last year, it seems that the company is ratcheting up investment in the business over time. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can ESSA Pharma Raise More Cash Easily?

While ESSA Pharma does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. 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. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

ESSA Pharma has a market capitalisation of US$68m and burnt through US$14m last year, which is 20% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

So, Should We Worry About ESSA Pharma's Cash Burn?

On this analysis of ESSA Pharma's cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, ESSA Pharma has 4 warning signs (and 2 which make us uncomfortable) we think you should know about.

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)

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.

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. Thank you for reading.