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Here's Why We're A Bit Worried About PolarityTE's (NASDAQ:PTE) Cash Burn Situation

Simply Wall St

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, 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 PolarityTE (NASDAQ:PTE) shareholders is whether they should be concerned by its rate of 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for PolarityTE

When Might PolarityTE Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. PolarityTE has such a small amount of debt that we'll set it aside, and focus on the US$46m in cash it held at September 2019. Importantly, its cash burn was US$70m over the trailing twelve months. That means it had a cash runway of around 8 months as of September 2019. Importantly, analysts think that PolarityTE will reach cashflow breakeven in 4 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. Depicted below, you can see how its cash holdings have changed over time.

NasdaqCM:PTE Historical Debt, November 28th 2019
NasdaqCM:PTE Historical Debt, November 28th 2019

How Well Is PolarityTE Growing?

Notably, PolarityTE actually ramped up its cash burn very hard and fast in the last year, by 106%, signifying heavy investment in the business. But shareholders are no doubt taking some confidence from the rockstar revenue growth of 359% during that same year. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. 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.

Can PolarityTE Raise More Cash Easily?

Given the trajectory of PolarityTE's cash burn, many investors will already be thinking about how it might raise more cash in the future. 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 to fund growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Since it has a market capitalisation of US$80m, PolarityTE's US$70m in cash burn equates to about 88% of its market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.

How Risky Is PolarityTE's Cash Burn Situation?

On this analysis of PolarityTE's cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap has us a bit worried. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. 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. When you don't have traditional metrics like earnings per share and free cash flow to value a company, many are extra motivated to consider qualitative factors such as whether insiders are buying or selling shares. Please Note: PolarityTE insiders have been trading shares, according to our data. Click here to check whether insiders have been buying or selling.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, 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.