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We're Hopeful That ProPhase Labs (NASDAQ:PRPH) Will Use Its Cash Wisely

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Simply Wall St
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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 ProPhase Labs (NASDAQ:PRPH) 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for ProPhase Labs

When Might ProPhase Labs Run Out Of Money?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at September 2019, ProPhase Labs had cash of US$4.7m and no debt. In the last year, its cash burn was US$1.5m. So it had a cash runway of about 3.2 years from September 2019. There's no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.

NasdaqCM:PRPH Historical Debt, January 9th 2020
NasdaqCM:PRPH Historical Debt, January 9th 2020

How Well Is ProPhase Labs Growing?

We reckon the fact that ProPhase Labs managed to shrink its cash burn by 52% over the last year is rather encouraging. But the revenue dip of 18% in the same period was a bit concerning. On balance, we'd say the company is improving over time. In reality, this article only makes a short study of the company's growth data. You can take a look at how ProPhase Labs has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can ProPhase Labs Raise Cash?

We are certainly impressed with the progress ProPhase Labs has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

ProPhase Labs has a market capitalisation of US$21m and burnt through US$1.5m last year, which is 7.3% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

How Risky Is ProPhase Labs's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way ProPhase Labs is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Notably, our data indicates that ProPhase Labs insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.

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)

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.