We can readily understand why investors are attracted to unprofitable companies. For example, BELLUS Health (TSE:BLU) shareholders have done very well over the last year, with the share price soaring by 170%. 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.
In light of its strong share price run, we think now is a good time to investigate how risky BELLUS Health's cash burn is. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for BELLUS Health
Does BELLUS Health 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. In June 2019, BELLUS Health had CA$42m in cash, and was debt-free. Looking at the last year, the company burnt through CA$12m. So it had a cash runway of about 3.5 years from June 2019. There's no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.
How Is BELLUS Health's Cash Burn Changing Over Time?
In our view, BELLUS Health doesn't yet produce significant amounts of operating revenue, since it reported just CA$35k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Over the last year its cash burn actually increased by a very significant 54%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Easily Can BELLUS Health Raise Cash?
Given its cash burn trajectory, BELLUS Health shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Companies can raise capital through either debt or equity. 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).