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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So, the natural question for Synairgen (LON:SNG) shareholders is whether they should be concerned by its rate of 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'.
When Might Synairgen Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2019, Synairgen had UK£3.5m in cash, and was debt-free. In the last year, its cash burn was UK£4.5m. That means it had a cash runway of around 9 months as of June 2019. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. You can see how its cash balance has changed over time in the image below.
How Easily Can Synairgen Raise Cash?
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 UK£9.0m, Synairgen's UK£4.5m in cash burn equates to about 50% of its market value. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.
How Risky Is Synairgen's Cash Burn Situation?
Given it's an early stage company, we don't have a lot of data with which to judge Synairgen's cash burn. And it is worth keeping in mind that early stage companies are generally more risky than well established ones. From what we can see the company is not in a strong position and there is a clear risk that the cash burn will cause problems for it. We think it's very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what Synairgen's CEO gets paid each year.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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