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Just because a business does not make any money, does not mean that the stock will go down. By way of example, CollPlant Biotechnologies (NASDAQ:CLGN) has seen its share price rise 156% over the last year, delighting many shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So notwithstanding the buoyant share price, we think it's well worth asking whether CollPlant Biotechnologies'cash burn is too risky In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
How Long Is CollPlant Biotechnologies' Cash Runway?
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. CollPlant Biotechnologies has such a small amount of debt that we'll set it aside, and focus on the US$5.6m in cash it held at March 2020. Looking at the last year, the company burnt through US$8.2m. That means it had a cash runway of around 8 months as of March 2020. 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. Depicted below, you can see how its cash holdings have changed over time.
How Well Is CollPlant Biotechnologies Growing?
One thing for shareholders to keep front in mind is that CollPlant Biotechnologies increased its cash burn by 305% in the last twelve months. And that is all the more of a concern in light of the fact that operating revenue was actually down by 56% in the last year, as the company no doubt scrambles to change its fortunes. Considering these two factors together makes us nervous about the direction the company seems to be heading. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Hard Would It Be For CollPlant Biotechnologies To Raise More Cash For Growth?
Since CollPlant Biotechnologies' revenue is down, and its cash burn is up, shareholders would quite reasonably be considering whether it can raise more money easily, if need be. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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).
Since it has a market capitalisation of US$209m, CollPlant Biotechnologies' US$8.2m in cash burn equates to about 3.9% of its 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.
So, Should We Worry About CollPlant Biotechnologies' Cash Burn?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought CollPlant Biotechnologies' cash burn relative to its market cap was relatively promising. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. Taking a deeper dive, we've spotted 4 warning signs for CollPlant Biotechnologies you should be aware of, and 3 of them shouldn't be ignored.
Of course CollPlant Biotechnologies 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.
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. 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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