We can easily understand why investors are attracted to unprofitable companies. For example, biotechnology and mining exploration companies often lose money for years before succeeding with a new treatment or mineral discovery. But while history boasts of these rare successes, those who fail are often forgotten; who remembers Pets.com?
So the natural question for PolyPid (NASDAQ:PYPD) shareholders is whether they should be concerned about its cash burn rate. For the purposes of this article, cash burn is the annual rate at which an unprofitable business spends money to finance its growth; its negative free cash flow. We will start by comparing its cash consumption with its cash reserves in order to calculate its cash trail.
Check out our latest analysis for PolyPid
How long does the PolyPid cash trail last?
You can calculate a company’s cash trail by dividing the amount of cash it has on hand by the rate at which it spends that money. When PolyPid last published its balance sheet in December 2021, it had no debt and cash worth $32 million. Importantly, its cash burn has been US$35 million over the past twelve months. Therefore, as of December 2021, he had about 11 months of cash trail. To be frank, this kind of short track puts us on edge, as it indicates that the company needs to significantly reduce its cash burn, or raise funds imminently. Below you can see how its liquidity has changed over time.
How is PolyPid’s cash burn changing over time?
Since PolyPid is not currently generating revenue, we consider it to be a start-up company. So, while we can’t look to sales to understand growth, we can look at cash burn trends to understand spending trends over time. Over the past year, its cash burn has actually increased by 55%. While this increased spending is undoubtedly intended to drive growth, if the trend continues, the company’s cash trail will shrink very quickly. While the past is always worth studying, it is the future that matters most. For this reason, it makes a lot of sense to take a look at our analysts’ forecasts for the company.
How difficult would it be for PolyPid to raise more cash for growth?
Given that its cash burn is headed in the wrong direction, PolyPid shareholders may want to anticipate when the company may need to raise more cash. Companies can raise capital either through debt or equity. One of the main advantages of publicly traded companies is that they can sell shares to investors to raise funds and finance their 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.
PolyPid’s cash burn of US$35 million represents about 34% of its market capitalization of US$105 million. This is not trivial, and if the company were to sell enough stock to fund another year’s growth at the current share price, you would likely see some pretty costly dilution.
So should we be worried about PolyPid’s cash burn?
PolyPid is not in a awesome position with respect to its cash burn position. While we can understand if some shareholders find his cash trail acceptable, we can’t ignore the fact that we consider his increasing consumption of cash to be downright troublesome. Looking at the factors mentioned in this short report, we think its cash burn is a bit risky, and that makes us slightly nervous about the stock. Separately, we looked at different risks affecting the business and identified 4 warning signs for PolyPid (2 of which don’t really suit us!) that you should know.
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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.