Just because a business does not make any money, does not mean that the stock will go down. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. 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 Bio-Gene Technology (ASX:BGT) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
See our latest analysis for Bio-Gene Technology
When Might Bio-Gene Technology Run Out Of Money?
You can calculate a company’s cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Bio-Gene Technology last reported its balance sheet in December 2019, it had zero debt and cash worth AU$3.6m. Looking at the last year, the company burnt through AU$1.7m. So it had a cash runway of about 2.2 years from December 2019. Arguably, that’s a prudent and sensible length of runway to have. The image below shows how its cash balance has been changing over the last few years.
How Is Bio-Gene Technology’s Cash Burn Changing Over Time?
In our view, Bio-Gene Technology doesn’t yet produce significant amounts of operating revenue, since it reported just AU$1.1m in the last twelve months. As a result, we think it’s a bit early to focus on the revenue growth, so we’ll limit ourselves to looking at how the cash burn is changing over time. Even though it doesn’t get us excited, the 28% reduction in cash burn year on year does suggest the company can continue operating for quite some time. Admittedly, we’re a bit cautious of Bio-Gene Technology due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Easily Can Bio-Gene Technology Raise Cash?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Bio-Gene Technology to raise more cash in the future. Companies can raise capital through either debt or equity. 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 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.
Bio-Gene Technology has a market capitalisation of AU$23m and burnt through AU$1.7m last year, which is 7.2% of the company’s market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year’s growth by issuing some new shares to investors, or even by taking out a loan.
How Risky Is Bio-Gene Technology’s Cash Burn Situation?
As you can probably tell by now, we’re not too worried about Bio-Gene Technology’s cash burn. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. Its cash burn reduction wasn’t quite as good, but was still rather encouraging! Considering all the factors discussed in this article, we’re not overly concerned about the company’s cash burn, although we do think shareholders should keep an eye on how it develops. On another note, Bio-Gene Technology has 6 warning signs (and 2 which are potentially serious) we think you should know about.
Of course Bio-Gene Technology may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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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