Just because a business does not make any money, does not mean that the stock will go down. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
Given this risk, we thought we’d take a look at whether Orion Nutraceuticals (CNSX:ORI) shareholders should be worried about its cash burn. For the purpose of this article, we’ll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). Let’s start with an examination of the business’s cash, relative to its cash burn.
See our latest analysis for Orion Nutraceuticals
Does Orion Nutraceuticals Have A Long Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at February 2019, Orion Nutraceuticals had cash of CA$19k and no debt. In the last year, its cash burn was CA$1.5m. Therefore, from February 2019 it seems to us it had less than two months of cash runway. It’s extremely surprising to us that the company has allowed its cash runway to get that short! You can see how its cash balance has changed over time in the image below.
Can Orion Nutraceuticals Raise More Cash Easily?
Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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).
Since it has a market capitalisation of CA$2.2m, Orion Nutraceuticals’s CA$1.5m in cash burn equates to about 69% of its market value. Given how large that cash burn is, relative to the market value of the entire company, we’d consider it to be a high risk stock, with the real possibility of extreme dilution.
So, Should We Worry About Orion Nutraceuticals’s Cash Burn?
Given it’s an early stage company, we don’t have a lot of data with which to judge Orion Nutraceuticals’s cash burn. Having said that, we can say that its cash runway was a real negative. But from what we can see its cash burn is extremely high, and we certainly don’t envy shareholders their position. When you don’t have traditional metrics like earnings per share and free cash flow to value a company, many are extra motivated to consider qualitative factors such as whether insiders are buying or selling shares. Please Note: Orion Nutraceuticals insiders have been trading shares, according to our data. Click here to check whether insiders have been buying or selling.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
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