U.S. Markets closed
  • S&P 500

    3,934.38
    -29.13 (-0.73%)
     
  • Dow 30

    33,476.46
    -305.02 (-0.90%)
     
  • Nasdaq

    11,004.62
    -77.39 (-0.70%)
     
  • Russell 2000

    1,799.52
    -18.77 (-1.03%)
     
  • Crude Oil

    71.46
    0.00 (0.00%)
     
  • Gold

    1,807.50
    +6.00 (+0.33%)
     
  • Silver

    23.66
    +0.41 (+1.76%)
     
  • EUR/USD

    1.0533
    -0.0027 (-0.2528%)
     
  • 10-Yr Bond

    3.5670
    +0.0760 (+2.18%)
     
  • Vix

    22.59
    +0.30 (+1.35%)
     
  • GBP/USD

    1.2255
    +0.0017 (+0.1372%)
     
  • USD/JPY

    136.6700
    +0.0400 (+0.0293%)
     
  • BTC-USD

    17,114.36
    -77.28 (-0.45%)
     
  • CMC Crypto 200

    402.56
    -3.68 (-0.91%)
     
  • FTSE 100

    7,476.63
    +4.46 (+0.06%)
     
  • Nikkei 225

    27,901.01
    +326.58 (+1.18%)
     

Is Ondine Biomedical (LON:OBI) In A Good Position To Deliver On Growth Plans?

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Ondine Biomedical (LON:OBI) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Ondine Biomedical

When Might Ondine Biomedical Run Out Of Money?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at June 2022, Ondine Biomedical had cash of CA$21m and no debt. In the last year, its cash burn was CA$19m. That means it had a cash runway of around 13 months as of June 2022. 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. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
debt-equity-history-analysis

How Is Ondine Biomedical's Cash Burn Changing Over Time?

Although Ondine Biomedical had revenue of CA$856k in the last twelve months, its operating revenue was only CA$856k in that time period. Given how low that operating leverage is, we think it's too early to put much weight on the revenue growth, so we'll focus on how the cash burn is changing, instead. In fact, it ramped its spending strongly over the last year, increasing cash burn by 104%. It's fair to say that sort of rate of increase cannot be maintained for very long, without putting pressure on the balance sheet. 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 Ondine Biomedical Raise More Cash Easily?

While Ondine Biomedical 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. 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 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 CA$96m, Ondine Biomedical's CA$19m in cash burn equates to about 20% of its market value. 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 Ondine Biomedical's Cash Burn A Worry?

On this analysis of Ondine Biomedical's cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Summing up, we think the Ondine Biomedical's cash burn is a risk, based on the factors we mentioned in this article. On another note, Ondine Biomedical has 4 warning signs (and 2 which are potentially serious) we think you should know about.

Of course Ondine Biomedical 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here