Just because a business does not make any money, does not mean that the stock will go down. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. 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 PledPharma (STO:PLED) 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). Let's start with an examination of the business's cash, relative to its cash burn.
Does PledPharma Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When PledPharma last reported its balance sheet in September 2019, it had zero debt and cash worth kr287m. In the last year, its cash burn was kr53m. That means it had a cash runway of about 5.4 years as of September 2019. Notably, however, analysts think that PledPharma will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. The image below shows how its cash balance has been changing over the last few years.
How Well Is PledPharma Growing?
We reckon the fact that PledPharma managed to shrink its cash burn by 50% over the last year is rather encouraging. But the operating revenue growth of 150% was even better. We think it is growing rather well, upon reflection. 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 Easily Can PledPharma Raise Cash?
We are certainly impressed with the progress PledPharma 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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 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).
PledPharma's cash burn of kr53m is about 5.2% of its kr1.0b market capitalisation. 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 PledPharma's Cash Burn?
It may already be apparent to you that we're relatively comfortable with the way PledPharma is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. But it's fair to say that its cash burn reduction was also very reassuring. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. 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 PledPharma's CEO gets paid each year.
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