April 15, 2024
We Think Clarity Pharmaceuticals (ASX:CU6) Can Easily Afford To Drive Business Growth


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. Indeed, PharmAust (ASX:PAA) stock is up 249% in the last year, providing strong gains for shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So notwithstanding the buoyant share price, we think it’s well worth asking whether PharmAust’s cash burn is too risky. 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.

See our latest analysis for PharmAust

How Long Is PharmAust’s Cash Runway?

A company’s cash runway is calculated by dividing its cash hoard by its cash burn. When PharmAust last reported its December 2023 balance sheet in February 2024, it had zero debt and cash worth AU$5.5m. Looking at the last year, the company burnt through AU$1.6m. That means it had a cash runway of about 3.5 years as of December 2023. 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.

debt-equity-history-analysis

How Well Is PharmAust Growing?

It was quite stunning to see that PharmAust increased its cash burn by 295% over the last year. While that certainly gives us pause for thought, we take a lot of comfort in the strong annual revenue growth of 66%. Considering both these factors, we’re not particularly excited by its growth profile. In reality, this article only makes a short study of the company’s growth data. You can take a look at how PharmAust is growing revenue over time by checking this visualization of past revenue growth.

How Hard Would It Be For PharmAust To Raise More Cash For Growth?

While PharmAust seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. 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 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.

PharmAust has a market capitalisation of AU$131m and burnt through AU$1.6m last year, which is 1.2% of the company’s market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

So, Should We Worry About PharmAust’s Cash Burn?

It may already be apparent to you that we’re relatively comfortable with the way PharmAust is burning through its cash. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. Looking at all the measures in this article, together, we’re not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. On another note, PharmAust has 5 warning signs (and 2 which don’t sit too well with us) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.



Source link

Leave a Reply

Your email address will not be published. Required fields are marked *