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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
Given this risk, we thought we'd take a look at whether InnoCan Pharma (CSE:INNO) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Does InnoCan Pharma 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. When InnoCan Pharma last reported its balance sheet in September 2019, it had zero debt and cash worth US$2.8m. In the last year, its cash burn was US$1.5m. That means it had a cash runway of around 22 months as of September 2019. 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.
Can InnoCan Pharma Raise More Cash Easily?
Companies can raise capital through either debt or equity. 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 US$14m, InnoCan Pharma's US$1.5m in cash burn equates to about 11% of its market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
How Risky Is InnoCan Pharma's Cash Burn Situation?
Given it's an early stage company, we don't have a lot of data with which to judge InnoCan Pharma's cash burn. But generally speaking, we can say that early stage companies like InnoCan Pharma are generally higher risk than well established businesses. To put it simply, we think its cash burn situation is totally fine given it is still developing its business. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the InnoCan Pharma CEO is paid..
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