Here's Why Reviva Pharmaceuticals Holdings (NASDAQ:RVPH) Must Use Its Cash Wisely
Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
Given this risk, we thought we'd take a look at whether Reviva Pharmaceuticals Holdings (NASDAQ:RVPH) shareholders should 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
View our latest analysis for Reviva Pharmaceuticals Holdings
When Might Reviva Pharmaceuticals Holdings Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Reviva Pharmaceuticals Holdings last reported its balance sheet in June 2022, it had zero debt and cash worth US$19m. Importantly, its cash burn was US$16m over the trailing twelve months. Therefore, from June 2022 it had roughly 14 months of cash runway. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.
How Is Reviva Pharmaceuticals Holdings' Cash Burn Changing Over Time?
Because Reviva Pharmaceuticals Holdings isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. The skyrocketing cash burn up 103% year on year certainly tests our nerves. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. 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.
How Hard Would It Be For Reviva Pharmaceuticals Holdings To Raise More Cash For Growth?
While Reviva Pharmaceuticals Holdings 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. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.
Reviva Pharmaceuticals Holdings' cash burn of US$16m is about 61% of its US$27m market capitalisation. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.
Is Reviva Pharmaceuticals Holdings' Cash Burn A Worry?
On this analysis of Reviva Pharmaceuticals Holdings' cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. Separately, we looked at different risks affecting the company and spotted 6 warning signs for Reviva Pharmaceuticals Holdings (of which 3 are potentially serious!) you should know about.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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