We can easily understand why investors are attracted to unprofitable companies. For example, although Amazon.com posted losses for many years after it listed, if you had bought and held the stock since 1999, you would have made a fortune. However, only a fool would ignore the risk of a loss-making company burning through its cash too quickly.
So should Bioarctic (STO: BIOA B) Are shareholders worried about its cash burn? In this report, we will consider the company’s annual negative free cash flow, which we will now refer to as “cash burn”. We will start by comparing its cash consumption with its cash reserves in order to calculate its cash trail.
See our latest analysis for BioArctic
Does BioArctic have a long cash trail?
A company’s cash trail is calculated by dividing its cash hoard by its cash burn. As of December 2021, BioArctic had cash of 848 million kr and no debt. Importantly, its cash burn was 145 million kr in the last twelve months. It therefore had a cash trail of approximately 5.9 years as of December 2021. Notably, however, analysts believe that BioArctic will break even (at the level of free cash flow) before that date. If that happens, then the length of his cash trail today would become a moot point. Below you can see how its liquidity has changed over time.
How is BioArctic growing?
Some investors might find it troubling that BioArctic is actually increasing its cash consumption, which has increased by 38% over the past year. Even more disturbing is that operating revenue fell 63% over the period. Considering these two factors together makes us nervous about the direction society seems to be heading. While the past is always worth studying, it is the future that matters most. You might want to take a look at the company’s expected growth over the next few years.
Can BioArctic raise more money easily?
While BioArctic appears to be in a pretty good position, it’s still worth considering how easily it could raise more cash, if only to fuel faster growth. Companies can raise capital either through debt or equity. Typically, a company will sell new stock on its own to raise cash and drive growth. We can compare a company’s cash burn to its market capitalization to get an idea of how many new shares a company would need to issue to fund a year’s operations.
BioArctic has a market cap of 9.5 billion kr and burned 145 million kr last year, or 1.5% of the company’s market value. This means it could easily issue a few shares to fund more growth and may well be able to borrow cheaply.
So should we be worried about BioArctic’s cash burn?
It may already be obvious to you that we are relatively comfortable with how BioArctic spends its money. In particular, we think its cash trail stands out as proof that the company is on top of spending. While we find its revenue decline to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we’re comfortable with. There’s no doubt that shareholders can rejoice that analysts expect it to break even before too long. Considering all the factors in this report, we are not at all worried about its cash burn, as the company appears to be well capitalized to spend as needed. Readers should have a good understanding of business risks before investing in a stock, and we have spotted 1 warning sign for BioArctic potential shareholders should consider before investing in a stock.
Sure, you might find a fantastic investment by looking elsewhere. So take a look at this free list of companies that insiders are buying, and this list of growth stocks (based on analyst forecasts)
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.