There is no doubt that it is possible to make money by owning shares of unprofitable companies. For example, although Amazon.com posted losses for many years after it listed, if you had bought and held the stock since 1999, you would have made a fortune. But the harsh reality is that many, many loss-making companies burn all their money and go bankrupt.
So the natural question for Organic Entera (NASDAQ:ENTX) shareholders is whether they should be concerned about its cash burn rate. For the purposes of this article, we will define cash burn as the amount of money the business spends each year to finance its growth (also known as negative free cash flow). First, we will determine its cash trail by comparing its cash consumption with its cash reserves.
See our latest review for Entera Bio
Does Entera Bio have a long cash trail?
A company’s cash trail is calculated by dividing its cash hoard by its cash burn. As of March 2022, Entera Bio had $20 million in cash and no debt. Last year, its cash burn was $12 million. Therefore, as of March 2022, he had approximately 21 months of cash. Above all, analysts believe that Entera Bio will break even in 4 years. This means that unless the company reduces its cash burn quickly, it may well be looking to raise more cash. You can see how his cash balance has changed over time in the image below.
How is Entera Bio’s cash burn changing over time?
While it’s good to see that Entera Bio has already started generating revenue from operations, last year it only produced US$482,000, so we don’t believe it is generating revenue. significant at this stage. Therefore, we believe it is a little early to focus on revenue growth, so we will limit ourselves to looking at how cash burn has evolved over time. With a cash burn rate up 13% over the past year, it looks like the company is increasing its investment in the business over time. However, the company’s true cash trail will therefore be shorter than suggested above, if expenses continue to rise. Obviously, however, the crucial factor is whether the company will expand its business in the future. You might want to take a look at the company’s expected growth over the next few years.
How easily can Entera Bio raise funds?
Although Entera Bio has a strong cash trail, its cash burn trajectory may cause some shareholders to think ahead to when the company might need to raise more cash. In general, a listed company can raise new funds by issuing shares or by going into debt. One of the main advantages of publicly traded companies is that they can sell shares to investors to raise funds and finance their growth. By comparing a company’s annual cash burn to its total market capitalization, we can roughly estimate how many shares it would need to issue to keep the company running for another year (at the same burn rate).
Entera Bio has a market cap of $56 million and spent $12 million last year, or 20% of the company’s market value. 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.
Is Entera Bio’s consumption of silver a concern?
Even though its increasing consumption of cash makes us a bit nervous, we are bound to mention that we thought Entera Bio’s cash lead was quite promising. Shareholders can rejoice that analysts predict it will break even. While we don’t think it has a problem with its cash burn, the analysis we’ve done in this article suggests that shareholders should think carefully about the potential cost of raising more money in the future. Separately, we looked at different risks affecting the business and identified 6 warning signs for Entera Bio (including 2 a little unpleasant!) to know.
Sure, you might find a fantastic investment by looking elsewhere. So take a look at this free list of companies that insiders are buying, and this list of growth stocks (based on analyst forecasts)
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.