As the US$121m market cap Eton Pharmaceuticals, Inc. (NASDAQ:ETON) released another year of negative earnings, investors may be on edge waiting for breakeven. Savvy investors should always reassess the situation of loss-making companies frequently, and keep informed about whether or not these businesses are in a strong cash position. 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. Eton Pharmaceuticals may need to come to market again, but the question is, when? Below, I’ve analysed the most recent financial data to help answer this question.
What is cash burn?
With a negative free cash flow of -US$16.2m, Eton Pharmaceuticals is chipping away at its US$15m cash reserves in order to run its business. The biggest threat facing Eton Pharmaceuticals investors is the company going out of business when it runs out of money and cannot raise any more capital. Not surprisingly, it is more common to find unprofitable companies in the fast-growth pharma industry. 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 Eton Pharmaceuticals need to raise more cash?
We can measure Eton Pharmaceuticals'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 Eton Pharmaceuticals’s case, its cash outflows fell by 49% last year, which may signal the company moving towards a more sustainable level of expenses. However, the current level of cash is not enough to sustain Eton Pharmaceuticals’s operations and the company may need to raise more capital within the year. Although this is a relatively simplistic calculation, and Eton Pharmaceuticals may continue to reduce its costs further or open a new line of credit instead of issuing new shares, the outcome of this analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.
This analysis isn’t meant to deter you from Eton Pharmaceuticals, but rather, to help you better understand the risks involved investing in loss-making companies. Now you know that even if the company was to continue to shrink its cash burn at this rate, it will not be able to sustain its operations given the current level of cash reserves. The potential equity raising resulting from this means you might be able to get shares at a lower price if the company raises capital next. This is only a rough assessment of financial health, and ETON likely also has company-specific issues impacting its cash management decisions. You should continue to research Eton Pharmaceuticals to get a better picture of the company by looking at:
Future Outlook: What are well-informed industry analysts predicting for ETON’s future growth? Take a look at our free research report of analyst consensus for ETON’s outlook.
Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Eton 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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