Here’s Why We’re Watching Small Pharma’s (CVE:DMT) Cash Burn

Even if a business loses money, shareholders have the potential 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 they succeed with new processing methods or mineral discoveries. But while history praises these rare successes, those that fail are often forgotten. Who remembers Pets.com?

Given this risk, we thought we should see whether small pharmaceutical company (CVE:DMT) Shareholders should worry about its cash burn. In this report, we will consider a company’s annual negative free cash flow, which will be referred to as “cash burn” hereafter. Let’s start by examining a business’ cash, relative to its cash burn.

Check Opportunities and Risks Within the CA pharmaceutical industry.

How long is the cash runway for small pharma?

You can calculate a company’s cash runway by dividing the amount of cash the company has by the rate at which cash is being spent. As of August 2022, Small Pharma had C$27 million in cash and no debt. Importantly, its cash burn was C$21 million over the trailing 12 months. So it has about 16 months of cash runway from August 2022. While this cash runway isn’t too worrisome, wise holders will stare into the distance and consider what might happen if the company runs out of cash. The chart below shows how its cash balance has changed over the past few years.

TSXV: DMT Debt-to-Equity Swap History October 30, 2022

How has the cash burn of a small pharma company changed over time?

In our opinion, the small pharma company has yet to generate a lot of operating income, as it only reported C$207 over the past 12 months. As such, we think it’s too early to focus on revenue growth, so we’ll limit ourselves to examining how cash burn changes over time. Its cash burn has actually increased by 96% over the past twelve months. While this increase in spending is undoubtedly meant to drive growth, if this trend continues, the company’s cash runway will shrink quickly. Clearly, however, the key factor is whether the company will grow its business in the future. For this reason, it makes sense to look at our analysts’ forecasts for the company.

How can small pharma companies easily raise cash?

Given its cash burn trajectory, Small Pharma shareholders may want to consider how easy it is to raise more cash, despite its solid cash runway. Issuing new stock or taking on debt are the most common ways for public companies to raise more money for their business. Many companies end up issuing new shares to fund future growth. By comparing a company’s annual cash burn to its total market capitalization, we can roughly estimate how many shares it must issue to keep the company afloat for another year (at the same burn rate).

Small Pharma’s C$21 million cash burn represents about 40% of its C$53 million market cap. That’s quite a significant cash burn, so shareholders will suffer some costly dilution if the company has to sell stock to cover another year of operating costs.

How dangerous is the cash-burning situation for small pharma?

While its increasing cash burn makes us a little nervous, we have to mention that we think Small Pharma’s cash runway is relatively promising. Taken together, we believe Small Pharma’s cash burn is a risk based on the factors we mention in this article.On the other hand, small pharmaceutical companies have 4 warning signs (and 3 related) we think you should know.

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This article by Simply Wall St is general in nature. We provide commentary based solely on historical data and analyst forecasts using an unbiased methodology and our articles are not intended to provide financial advice. It does not constitute advice to buy or sell any stock and does not take into account your objectives or your financial situation. Our goal is to bring you long-term focused analytics driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Wall Street has no positions in any of the stocks mentioned.

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