Just because a business isn’t making money doesn’t mean the stock will go down. For example, biotech and mineral exploration companies often lose money for years before they are successful with a new treatment or mineral discovery. But the harsh reality is that many, many loss-making companies burn all their money and go bankrupt.
In view of this risk, we thought to examine whether COMPAS course (NASDAQ: CMPS) shareholders should be concerned about its consumption of cash. In this report, we will consider the company’s annual negative free cash flow, which we now call âcash burnâ. Let’s start with a review of the company’s cash flow, relative to its cash consumption.
See our latest review for COMPASS Pathways
When might COMPASS Pathways run out of money?
You can calculate a company’s cash flow trail by dividing the amount of cash it has by the rate at which it spends that cash. When COMPASS Pathways last released its balance sheet in September 2021, it had no debt and $ 294 million in cash. In the past year, its cash consumption amounted to US $ 62 million. This means he had a cash flow track of around 4.7 years as of September 2021. A track of this length gives the company the time and space it needs to grow its business. You can see how his cash balance has changed over time in the image below.
How does COMPASS Pathways money consumption change over time?
COMPASS Pathways has not recorded any revenue in the past year, indicating that it is a start-up company that continues to grow its business. Nonetheless, we can still examine its cash consumption trajectory as part of our assessment of its cash consumption situation. Over the past year, its cash consumption has actually increased by a very significant 100%. Often times, increased cash consumption just means that a business is speeding up its business development, but always keep in mind that this leads to a reduction in the cash flow trail. Obviously, however, the crucial factor is whether the company will expand its business in the future. For this reason, it makes a lot of sense to take a look at our analyst forecast for the company.
How difficult would it be for COMPASS Pathways to raise more cash for growth?
Given its cash-consuming trajectory, COMPASS Pathways shareholders may want to consider how easily it could raise more cash, despite its strong liquidity track. The issuance of new shares or debt are the most common ways for a listed company to raise more money for its activity. Typically, a company itself will sell new stocks to raise funds and drive growth. By looking at a company’s cash consumption relative to its market capitalization, we get an idea of ââhow many shareholders would be diluted if the company needed to raise enough cash to cover a company’s cash consumption. other year.
Given that it has a market capitalization of US $ 910 million, COMPASS Pathways’ US $ 62 million in cash consumption is equivalent to approximately 6.9% of its market value. Given that this is a rather small percentage, it would probably be very easy for the company to finance the growth of another year by issuing new shares to investors, or even taking out a loan.
How risky is COMPASS Pathways’ money-consuming situation?
It may already be obvious to you that we are relatively comfortable with the way COMPASS Pathways burns its money. In particular, we believe that its cash flow track stands out as proof that the company has good control over its spending. While we find its growing cash consumption to be a bit negative, once we consider the other metrics mentioned in this article together, the overall picture is one we’re comfortable with. Looking at all of the metrics in this article, together, we’re not worried about its rate of cash consumption; the business appears to be well above its medium-term spending needs. On another note, we conducted a thorough investigation of the company and identified 5 warning signs for COMPASS trails (2 make us uncomfortable!) Which you should be aware of before investing here.
Sure, you might find a fantastic investment looking elsewhere. So take a look at this free list of companies that insiders buy, and this list of growth stocks (according to analysts’ forecasts)
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