Will Organovo Holdings (NASDAQ:ONVO) Spend Its Cash Wisely?
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.
Given this risk, we thought we'd take a look at whether Organovo Holdings (NASDAQ:ONVO) shareholders should be worried about its 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.
See our latest analysis for Organovo Holdings
How Long Is Organovo Holdings' 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 September 2022, Organovo Holdings had cash of US$24m and no debt. Looking at the last year, the company burnt through US$9.9m. That means it had a cash runway of about 2.4 years as of September 2022. Arguably, that's a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.
How Is Organovo Holdings' Cash Burn Changing Over Time?
Whilst it's great to see that Organovo Holdings has already begun generating revenue from operations, last year it only produced US$1.6m, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Over the last year its cash burn actually increased by 27%, which suggests that management are increasing investment in future growth, but not too quickly. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Organovo Holdings is building its business over time.
How Hard Would It Be For Organovo Holdings To Raise More Cash For Growth?
While Organovo Holdings 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. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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).
Organovo Holdings' cash burn of US$9.9m is about 45% of its US$22m market capitalisation. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).
How Risky Is Organovo Holdings' Cash Burn Situation?
Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Organovo Holdings' 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. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 3 warning signs for Organovo Holdings that investors should know when investing in the stock.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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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.
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