Organovo Holdings Inc (NASDAQ:ONVO) announced a loss of -$39.78M in its most recent earnings update. Although some investors expected this, their belief in the path to profitability for ONVO may be wavering. Since ONVO is currently burning more cash than it is making, it’s likely the business will need funding for future growth, and additional cash raising may dilute the value of your shares. Today I’ve examined ONVO’s financial data to roughly assess when the company may need to raise new capital. See our latest analysis for ONVO
What is cash burn?
With a negative operating cash flow of -$31.30M, ONVO is chipping away at its $54.97M cash reserves in order to run its business. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Not surprisingly, it is more common to find unprofitable companies in the high-growth biotech industry. These businesses operate in a highly competitive environment and face running down its cash holdings too fast in order to keep up with innovation.
When will ONVO need to raise more cash?
Opex (excluding one-offs) grew by 22.18% over the past year, which is rather substantial. This means that, if ONVO continues to grow its opex at this rate, given how much money it currently has in the bank, it will need to raise capital again in 2.1 years. Though, if ONVO kept its opex level at $23.1M, it will still come to market within the next couple of years, but slightly later.
Although this is a relatively simplistic calculation, and ONVO may reduce its costs or raise debt capital instead of coming to equity markets, the outcome of this analysis still helps us understand how sustainable the ONVO’s operation is, and when things may have to change.
What this means for you:
Are you a shareholder? You now have a better understanding of the risks you may face holding onto the stock, since we know the company could potentially run into some issues in the next couple of years. Keep in mind that opex is only one side of the coin. I recommend also looking at ONVO’s revenues in order to forecast when the company will become breakeven and start producing profits for shareholders.
Are you a potential investor? This analysis isn’t meant to deter you from buying ONVO, but rather, to help you understand the risks involved investing in loss-making companies. The cash burn analysis result indicates a cash constraint for ONVO, due to its high opex growth and its level of cash reserves. You could potentially get a better deal on the share price when the company raises capital next.
Good management manages cash well – have a peek at ONVO’s CEO experience and the tenure of the board here. If you believe you should cushion your portfolio with something less risky, scroll through my list of highly profitable companies to add to your portfolio..
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.