Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
Given this risk, we thought we'd take a look at whether Proteomics International Laboratories (ASX:PIQ) 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. Let's start with an examination of the business's cash, relative to its cash burn.
How Long Is Proteomics International Laboratories's 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. When Proteomics International Laboratories last reported its balance sheet in December 2019, it had zero debt and cash worth AU$2.5m. Importantly, its cash burn was AU$3.2m over the trailing twelve months. That means it had a cash runway of around 9 months as of December 2019. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Proteomics International Laboratories Growing?
Notably, Proteomics International Laboratories actually ramped up its cash burn very hard and fast in the last year, by 117%, signifying heavy investment in the business. While operating revenue was up over the same period, the 10% gain gives us scant comfort. Taken together, we think these growth metrics are a little worrying. In reality, this article only makes a short study of the company's growth data. You can take a look at how Proteomics International Laboratories has developed its business over time by checking this visualization of its revenue and earnings history.
How Easily Can Proteomics International Laboratories Raise Cash?
Given the trajectory of Proteomics International Laboratories's cash burn, many investors will already be thinking about how it might raise more 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.
Since it has a market capitalisation of AU$31m, Proteomics International Laboratories's AU$3.2m in cash burn equates to about 10% of its market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
Is Proteomics International Laboratories's Cash Burn A Worry?
On this analysis of Proteomics International Laboratories's cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. 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. Separately, we looked at different risks affecting the company and spotted 7 warning signs for Proteomics International Laboratories (of which 2 make us uncomfortable!) you should know about.
Of course Proteomics International Laboratories 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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