Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
Given this risk, we thought we’d take a look at whether Uni-Bio Science Group (HKG:690) shareholders should be worried about its cash burn. In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
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Does Uni-Bio Science Group Have A Long Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2022, Uni-Bio Science Group had cash of HK$101m and no debt. Importantly, its cash burn was HK$27m over the trailing twelve months. Therefore, from June 2022 it had 3.7 years of cash runway. A runway of this length affords the company the time and space it needs to develop the business. You can see how its cash balance has changed over time in the image below.
Is Uni-Bio Science Group’s Revenue Growing?
Given that Uni-Bio Science Group actually had positive free cash flow last year, before burning cash this year, we’ll focus on its operating revenue to get a measure of the business trajectory. It’s nice to see that operating revenue was up 31% in the last year. In reality, this article only makes a short study of the company’s growth data. This graph of historic revenue growth shows how Uni-Bio Science Group is building its business over time.
How Hard Would It Be For Uni-Bio Science Group To Raise More Cash For Growth?
While Uni-Bio Science Group is showing solid revenue growth, 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. 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).
Uni-Bio Science Group’s cash burn of HK$27m is about 6.4% of its HK$420m market capitalisation. That’s a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
How Risky Is Uni-Bio Science Group’s Cash Burn Situation?
As you can probably tell by now, we’re not too worried about Uni-Bio Science Group’s cash burn. For example, we think its cash runway suggests that the company is on a good path. And even its revenue growth was very encouraging. After considering a range of factors in this article, we’re pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Its important for readers to be cognizant of the risks that can affect the company’s operations, and we’ve picked out 3 warning signs for Uni-Bio Science Group that investors should know when investing in the stock.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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