There's no doubt that money can be made by owning shares of unprofitable businesses. 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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given this risk, we thought we'd take a look at whether CombiGene (STO:COMBI) 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
How Long Is CombiGene's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When CombiGene last reported its balance sheet in September 2019, it had zero debt and cash worth kr3.8m. Looking at the last year, the company burnt through kr36m. So it seems to us it had a cash runway of less than two months from September 2019. To be frank we are alarmed by how short that cash runway is! You can see how its cash balance has changed over time in the image below.
How Hard Would It Be For CombiGene To Raise More Cash For Growth?
Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash to drive 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 kr71m, CombiGene's kr36m in cash burn equates to about 51% 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 CombiGene's Cash Burn Situation?
Because CombiGene is an early stage company, we don't have a great deal of data on which to form an opinion of its cash burn. However, it is fair to say that its cash runway made us nervous. But from what we can see its cash burn is extremely high, and we certainly don't envy shareholders their position. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that CombiGene insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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