Anixa Biosciences, Inc. (NASDAQ:ANIX) continues its loss-making streak, announcing negative earnings for its latest financial year ending. The single most important question to ask when you’re investing in a loss-making company is – will it need to raise cash again, and if so, when? Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to raise further funds. This may not always be on good terms, which could hurt current shareholders if the new deal lowers the value of their shares. Today I’ve examined Anixa Biosciences’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital.
What is cash burn?
Anixa Biosciences currently has US$6.5m in the bank, with negative free cash flow of -US$4.6m. The biggest threat facing Anixa Biosciences investors is the company going out of business when it runs out of money and cannot raise any more capital. Furthermore, it is not uncommon to find loss-makers in an industry such as biotech. These companies face the trade-off between running the risk of depleting its cash reserves too fast, or falling behind competition on innovation and gaining market share by investing too slowly.
When will Anixa Biosciences need to raise more cash?
When negative, free cash flow (which I define as cash from operations minus fixed capital investment) can be an effective measure of how much Anixa Biosciences has to spend each year in order to keep its business running.
In Anixa Biosciences’s case, its cash outflows fell by 11% last year, which may signal the company moving towards a more sustainable level of expenses. But, if the company maintains its cash burn at the current level of -US$4.6m, it may still need additional capital within the next 1.4 years. Although this is a relatively simplistic calculation, and Anixa Biosciences may continue to reduce its costs further or borrow money instead of raising new equity capital, the outcome of this analysis still helps us understand how sustainable the Anixa Biosciences operation is, and when things may have to change.
Loss-making companies are a risky play, even those that are reducing their cash burn over time. Though, this shouldn’t discourage you from considering entering the stock in the future. The cash burn analysis result indicates a cash constraint for the company, due to its current level of cash reserves. The potential equity raising resulting from this means you might be able to get shares at a lower price if the company raises capital next. Keep in mind I haven't considered other factors such as how ANIX is expected to perform in the future. I recommend you continue to research Anixa Biosciences to get a more holistic view of the company by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ANIX’s future growth? Take a look at our free research report of analyst consensus for ANIX’s outlook.
- Valuation: What is ANIX worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ANIX is currently mispriced by the market.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 31 July 2019. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.
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