Here's Why We're Not At All Concerned With Edesa Biotech's (NASDAQ:EDSA) Cash Burn Situation
Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So should Edesa Biotech (NASDAQ:EDSA) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
See our latest analysis for Edesa Biotech
How Long Is Edesa Biotech's Cash Runway?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at March 2022, Edesa Biotech had cash of US$16m and no debt. Looking at the last year, the company burnt through US$7.1m. Therefore, from March 2022 it had 2.2 years of cash runway. Importantly, though, analysts think that Edesa Biotech will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. The image below shows how its cash balance has been changing over the last few years.
How Is Edesa Biotech's Cash Burn Changing Over Time?
In our view, Edesa Biotech doesn't yet produce significant amounts of operating revenue, since it reported just US$500 in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Even though it doesn't get us excited, the 46% reduction in cash burn year on year does suggest the company can continue operating for quite some time. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Easily Can Edesa Biotech Raise Cash?
While Edesa Biotech is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. 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. 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.
Edesa Biotech has a market capitalisation of US$33m and burnt through US$7.1m last year, which is 21% 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 Edesa Biotech's Cash Burn?
As you can probably tell by now, we're not too worried about Edesa Biotech's cash burn. For example, we think its cash runway suggests that the company is on a good path. Although its cash burn relative to its market cap does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. It's clearly very positive to see that analysts are forecasting the company will break even fairly soon. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. Taking a deeper dive, we've spotted 5 warning signs for Edesa Biotech you should be aware of, and 2 of them don't sit too well with us.
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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.
