Just because a business does not make any money, does not mean that the stock will go down. For example, PAVmed (NASDAQ:PAVM) shareholders have done very well over the last year, with the share price soaring by 204%. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
In light of its strong share price run, we think now is a good time to investigate how risky PAVmed’s cash burn is. 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). First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. As at March 2021, PAVmed had cash of US$49m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through US$27m. That means it had a cash runway of around 21 months as of March 2021. While that cash runway isn’t too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. Depicted below, you can see how its cash holdings have changed over time.
PAVmed didn’t record any revenue over the last year, indicating that it’s an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. The skyrocketing cash burn up 106% year on year certainly tests our nerves. It’s fair to say that sort of rate of increase cannot be maintained for very long, without putting pressure on the balance sheet. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
While PAVmed does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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.
PAVmed has a market capitalisation of US$494m and burnt through US$27m last year, which is 5.5% of the company’s market value. That’s a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought PAVmed’s cash burn relative to its market cap was relatively promising. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we’re not too worried about its rate of cash burn. Separately, we looked at different risks affecting the company and spotted 3 warning signs for PAVmed (of which 1 shouldn’t be ignored!) you should know about.
Of course PAVmed may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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. 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.
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