Trailing twelve-month data shows us that Evoke Pharma, Inc.'s (NASDAQ:EVOK) earnings loss has accumulated to -US$7.4m. Although some investors expected this, their belief in the path to profitability for Evoke Pharma may be wavering. 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? 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. Evoke Pharma 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?
Currently, Evoke Pharma has US$7.4m in cash holdings and producing negative free cash flow of -US$6.0m. The biggest threat facing Evoke Pharma investors is the company going out of business when it runs out of money and cannot raise any more capital. Furthermore, it is not uncommon to find loss-makers in an industry such as pharma. The industry is highly competitive, with companies racing to innovate at the risk of burning through their cash too fast.
When will Evoke Pharma need to raise more cash?
We can measure Evoke Pharma'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.
Over the last twelve months, free cash outflows increased by 11%, which is fairly normal for a small-cap. My cash burn analysis suggests that Evoke Pharma has a cash runway of 1.1 years, given its current level of cash holdings. This may mean it will be issuing new shares sooner than shareholders would like. Furthermore, even if Evoke Pharma kept its cash burn rate at the current -US$6.0m, it may need to raise capital in about 1.2 years. Even though this is analysis is fairly basic, and Evoke Pharma still can cut its overhead in the near future, or open a new line of credit instead of issuing new shares, the outcome of this analysis still helps us understand how sustainable the Evoke Pharma operation is, and when things may have to change.
The risks involved in investing in loss-making Evoke Pharma means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. Now you know that if the company was to continue to grow its cash burn at a double-digit rate, it will not be able to sustain its operations given the current level of cash reserves. This suggests an opportunity to enter into the stock, potentially at an attractive price, should Evoke Pharma need to raise capital to fund its growth. Keep in mind I haven't considered other factors such as how EVOK is expected to perform in the future. You should continue to research Evoke Pharma to get a more holistic view of the company by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EVOK’s future growth? Take a look at our free research report of analyst consensus for EVOK’s outlook.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Evoke Pharma’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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