Conatus Pharmaceuticals Inc. (NASDAQ:CNAT) continues its loss-making streak, announcing negative earnings for its latest financial year ending. 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? This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that Conatus Pharmaceuticals is spending more money than it earns, it will need to fund its expenses via external sources of capital. Looking at Conatus Pharmaceuticals’s latest financial data, I will estimate when the company may run out of cash and need to raise more money.
What is cash burn?
Conatus Pharmaceuticals currently has US$29m in the bank, with negative free cash flow of -US$29.6m. The biggest threat facing Conatus Pharmaceuticals 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 biotech. The industry is highly competitive, with companies racing to innovate at the risk of burning through their cash too fast.
When will Conatus Pharmaceuticals need to raise more cash?
We can measure Conatus Pharmaceuticals'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.
In Conatus Pharmaceuticals’s case, its cash outflows fell by 51% last year, which may signal the company moving towards a more sustainable level of expenses. However, the current level of cash is not enough to sustain Conatus Pharmaceuticals’s operations and the company may need to raise more capital within the year. Even though this is analysis is fairly basic, and Conatus Pharmaceuticals still can cut its overhead further, or borrow money instead of raising new equity capital, the outcome of this analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.
This analysis isn’t meant to deter you from Conatus Pharmaceuticals, but rather, to help you better understand the risks involved investing in loss-making companies. Now you know that even if the company was to continue to shrink its cash burn at this rate, it will not be able to sustain its operations given the current level of cash reserves. The potential equity raising resulting from this means you might be able to get shares at a lower price if the company raises capital next. I admit this is a fairly basic analysis for CNAT's financial health. Other important fundamentals need to be considered as well. You should continue to research Conatus Pharmaceuticals to get a better picture of the company by looking at:
- Historical Performance: What has CNAT's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Conatus Pharmaceuticals’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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