There's no doubt that money can be made by owning shares of unprofitable businesses. 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 Pluristem Therapeutics (NASDAQ:PSTI) shareholders should be worried about its 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). Let's start with an examination of the business's cash, relative to its cash burn.
Does Pluristem Therapeutics Have A Long 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 2019, Pluristem Therapeutics had cash of US$19m and no debt. Importantly, its cash burn was US$28m over the trailing twelve months. That means it had a cash runway of around 8 months as of September 2019. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. The image below shows how its cash balance has been changing over the last few years.
How Is Pluristem Therapeutics's Cash Burn Changing Over Time?
In our view, Pluristem Therapeutics doesn't yet produce significant amounts of operating revenue, since it reported just US$50k in the last twelve months. 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 13%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. 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 Pluristem Therapeutics Raise More Cash Easily?
Given its cash burn trajectory, Pluristem Therapeutics shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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.
Pluristem Therapeutics has a market capitalisation of US$50m and burnt through US$28m last year, which is 56% of the company's market value. 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).
So, Should We Worry About Pluristem Therapeutics's Cash Burn?
We must admit that we don't think Pluristem Therapeutics is in a very strong position, when it comes to its cash burn. While its increasing cash burn wasn't too bad, its cash burn relative to its market cap does leave us rather nervous. After considering the data discussed in this article, we don't have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that Pluristem Therapeutics insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
Of course Pluristem Therapeutics 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.
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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. Thank you for reading.