Even when a business is losing money, it’s possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question forBotanix Pharmaceuticals(ASX:BOT) shareholders is whether they should be concerned by its rate of 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). The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
See our latest analysis for Botanix Pharmaceuticals
How Long Is Botanix Pharmaceuticals’s Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2019, Botanix Pharmaceuticals had cash of AU$4.7m and no debt. In the last year, its cash burn was AU$13m. That means it had a cash runway of around 4 months as of June 2019. Importantly, the one analyst we see covering the stock thinks that Botanix Pharmaceuticals will reach cashflow breakeven in 2 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. You can see how its cash balance has changed over time in the image below.
ASX:BOT Historical Debt, January 1st 2020How Well Is Botanix Pharmaceuticals Growing?
Some investors might find it troubling that Botanix Pharmaceuticals is actuallyincreasingits cash burn, which is up 33% in the last year. On a more positive note, the operating revenue improved by 164% over the period, offering an indication that the expenditure may well be worthwhile. If revenue is maintained once spending on growth decreases, that could well pay off! It seems to be growing nicely. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek athow much the company is expected to grow in the next few years.
How Hard Would It Be For Botanix Pharmaceuticals To Raise More Cash For Growth?
Since Botanix Pharmaceuticals has been boosting its cash burn, the market will likely be considering how it can raise more cash 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 to 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).
Botanix Pharmaceuticals has a market capitalisation of AU$81m and burnt through AU$13m last year, which is 16% of the company’s market value. Given that situation, it’s fair to say the company wouldn’t have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
Is Botanix Pharmaceuticals’s Cash Burn A Worry?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Botanix Pharmaceuticals’s revenue growth was relatively promising. Shareholders can take heart from the fact that at least one analyst is forecasting it will reach breakeven. Even though we don’t think it has a problem with its cash burn, the analysis we’ve done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. Notably, our data indicates that Botanix Pharmaceuticals insiders have been trading the shares.You can discover if they are buyers or sellers by clicking on this link.
Of course,you might find a fantastic investment by looking elsewhere.So take a peek at thisfreelist of interesting companies,andthis list of stocks growth stocks (according to analyst forecasts)
If you spot an error that warrants correction, please contact the editor at[email protected]. 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
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