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Just because a business does not make any money, does not mean that the stock will go down. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So, the natural question for Catabasis Pharmaceuticals (NASDAQ:CATB) shareholders is whether they should be concerned by its rate of 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Does Catabasis Pharmaceuticals Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2019, Catabasis Pharmaceuticals had cash of US$41m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was US$24m. That means it had a cash runway of around 20 months as of September 2019. 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. Depicted below, you can see how its cash holdings have changed over time.
How Is Catabasis Pharmaceuticals's Cash Burn Changing Over Time?
In our view, Catabasis Pharmaceuticals doesn't yet produce significant amounts of operating revenue, since it reported just US$250k in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. Cash burn was pretty flat over the last year, which suggests that management are holding spending steady while the business advances its strategy. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
Can Catabasis Pharmaceuticals Raise More Cash Easily?
Since its cash burn is increasing (albeit only slightly), Catabasis Pharmaceuticals shareholders should still be mindful of the possibility it will require more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Catabasis Pharmaceuticals's cash burn of US$24m is about 36% of its US$67m market capitalisation. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
Is Catabasis Pharmaceuticals's Cash Burn A Worry?
Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Catabasis Pharmaceuticals's cash runway was relatively promising. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. We think it's very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what Catabasis Pharmaceuticals's CEO gets paid each year.
Of course Catabasis Pharmaceuticals may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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