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There's no doubt that money can be made by owning shares of unprofitable businesses. Indeed, Evgen Pharma (LON:EVG) stock is up 129% 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 Evgen Pharma'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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
How Long Is Evgen Pharma's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2020, Evgen Pharma had cash of UK£2.3m and no debt. Looking at the last year, the company burnt through UK£2.9m. So it had a cash runway of approximately 10 months from September 2020. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.
How Is Evgen Pharma's Cash Burn Changing Over Time?
In the last year, Evgen Pharma did book revenue of UK£194k, but its revenue from operations was less, at just UK£194k. Given how low that operating leverage is, we think it's too early to put much weight on the revenue growth, so we'll focus on how the cash burn is changing, instead. Over the last year its cash burn actually increased by 15%, which suggests that management are increasing investment in future growth, but not too quickly. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Hard Would It Be For Evgen Pharma To Raise More Cash For Growth?
Given its cash burn trajectory, Evgen Pharma shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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).
Since it has a market capitalisation of UK£21m, Evgen Pharma's UK£2.9m in cash burn equates to about 14% of its market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
So, Should We Worry About Evgen Pharma's Cash Burn?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Evgen Pharma's cash burn relative to its market cap was relatively promising. Summing up, we think the Evgen Pharma's cash burn is a risk, based on the factors we mentioned in this article. Separately, we looked at different risks affecting the company and spotted 7 warning signs for Evgen Pharma (of which 4 don't sit too well with us!) you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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