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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So, the natural question for Bioservo Technologies (STO:BIOS) shareholders is whether they should be concerned by its rate of 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. Let’s start with an examination of the business’s cash, relative to its cash burn.
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Does Bioservo Technologies Have A Long Cash Runway?
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 Bioservo Technologies last reported its balance sheet in September 2019, it had zero debt and cash worth kr9.4m. Looking at the last year, the company burnt through kr22m. That means it had a cash runway of around 5 months as of September 2019. Importantly, the one analyst we see covering the stock thinks that Bioservo Technologies will reach cashflow breakeven in 3 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. The image below shows how its cash balance has been changing over the last few years.
How Well Is Bioservo Technologies Growing?
Over the last year, Bioservo Technologies maintained its cash burn at a fairly steady level. And while its operating revenue growth of 6.5% didn’t shoot the lights out, it does, at least, point to business traction. Considering both these factors, we’re not particularly excited by its growth profile. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Hard Would It Be For Bioservo Technologies To Raise More Cash For Growth?
Given Bioservo Technologies’s revenue is receding, there’s a considerable chance it will eventually need to raise more money to spend on driving growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.
Since it has a market capitalisation of kr202m, Bioservo Technologies’s kr22m in cash burn equates to about 11% 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 Bioservo Technologies’s Cash Burn?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Bioservo Technologies’s cash burn relative to its market cap was relatively promising. Shareholders can take heart from the fact that at least one analyst is forecasting it will reach breakeven. Summing up, we think the Bioservo Technologies’s cash burn is a risk, based on the factors we mentioned in this article. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Bioservo Technologies CEO is paid..
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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