Just because a business does not make any money, does not mean that the stock will go down. Indeed, e-Therapeutics (LON:ETX) stock is up 477% in the last year, providing strong gains for shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
In light of its strong share price run, we think now is a good time to investigate how risky e-Therapeutics's cash burn is. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
How Long Is e-Therapeutics's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In January 2020, e-Therapeutics had UK£3.8m in cash, and was debt-free. Looking at the last year, the company burnt through UK£2.0m. Therefore, from January 2020 it had roughly 23 months of cash runway. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.
How Is e-Therapeutics's Cash Burn Changing Over Time?
In our view, e-Therapeutics doesn't yet produce significant amounts of operating revenue, since it reported just UK£456k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 45% over the last year suggests some degree of prudence. e-Therapeutics makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
Can e-Therapeutics Raise More Cash Easily?
While e-Therapeutics is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.
e-Therapeutics's cash burn of UK£2.0m is about 5.2% of its UK£39m market capitalisation. 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 e-Therapeutics's Cash Burn Situation?
As you can probably tell by now, we're not too worried about e-Therapeutics's cash burn. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. Its cash runway wasn't quite as good, but was still rather encouraging! Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Taking a deeper dive, we've spotted 4 warning signs for e-Therapeutics you should be aware of, and 1 of them is significant.
Of course e-Therapeutics 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 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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