There’s no doubt that money can be made by owning shares of unprofitable businesses. Indeed, Noxopharm (ASX:NOX) stock is up 189% in the last year, providing strong gains for shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So notwithstanding the buoyant share price, we think it’s well worth asking whether Noxopharm’s cash burn is too risky. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
View our latest analysis for Noxopharm
How Long Is Noxopharm’s Cash Runway?
A company’s cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In December 2023, Noxopharm had AU$5.2m in cash, and was debt-free. Looking at the last year, the company burnt through AU$6.1m. Therefore, from December 2023 it had roughly 10 months of cash runway. That’s quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.
How Is Noxopharm’s Cash Burn Changing Over Time?
While Noxopharm did record statutory revenue of AU$3.9m over the last year, it didn’t have any revenue from operations. That means we consider it a pre-revenue business, and we will focus our growth analysis on cash burn, for now. Over the last year its cash burn actually increased by 16%, which suggests that management are increasing investment in future growth, but not too quickly. That’s not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. Noxopharm makes us a little nervous due to its lack of substantial operating revenue. So we’d generally prefer stocks from this list of stocks that have analysts forecasting growth.
Can Noxopharm Raise More Cash Easily?
Given its cash burn trajectory, Noxopharm shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future growth. We can compare a company’s cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year’s operations.
Since it has a market capitalisation of AU$32m, Noxopharm’s AU$6.1m in cash burn equates to about 19% of its market value. Given that situation, it’s fair to say the company wouldn’t have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
Is Noxopharm’s Cash Burn A Worry?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Noxopharm’s cash burn relative to its market cap was relatively promising. Summing up, we think the Noxopharm’s cash burn is a risk, based on the factors we mentioned in this article. Taking a deeper dive, we’ve spotted 4 warning signs for Noxopharm you should be aware of, and 2 of them are a bit concerning.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
