It is easy to understand why investors are attracted to unprofitable companies. For example, although the software as a service company Salesforce.com lost money for years as it increased its recurring revenue, if you had owned stocks since 2005, you would have done very well. But while history praises these rare successes, those that fail are often forgotten; who remembers Pets.com?
In view of this risk, we thought to examine whether Bio-Gene Technology (ASX: BGT) 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. The first step is to compare its cash consumption with its cash reserves, to give us its âcash flow trackâ.
Check out our latest review for Bio-Gene technology
How long is Bio-Gene Technology’s cash flow track?
A company’s cash flow track is calculated by dividing its cash reserve by its cash consumption. As of June 2021, Bio-Gene Technology had AU $ 3.9 million in cash and was debt free. Importantly, his cash consumption was AU $ 1.8 million in the past twelve months. This means he had a cash trail of around 2.2 years as of June 2021. It is arguably a prudent and reasonable trail length. You can see how her cash balance has changed over time in the image below.
How does Bio-Gene Technology’s silver consumption change over time?
In our opinion, Bio-Gene Technology is not yet generating significant operating revenue, as it has brought in only AU $ 63,000 in the past twelve months. As a result, we think it’s a bit early to focus on revenue growth, so we’ll limit ourselves to looking at how cash consumption has changed over time. Over the past year, its cash consumption has actually increased by 11%, which suggests that management is increasing its investments in future growth, but not too quickly. However, the true cash flow trail for the business will therefore be shorter than suggested above if expenses continue to increase. Certainly, we are a little cautious of Bio-Gene Technology due to its lack of significant operating revenue. So we generally prefer stocks from this list of stocks that analysts expect to grow.
Can Bio-Gene Technology Easily Raise More Money?
While Bio-Gene Technology has a strong cash flow track, its cash-consuming trajectory may cause some shareholders to think about when the company might need to raise more cash. Generally speaking, a listed company can raise new liquidity by issuing shares or going into debt. Many companies end up issuing new shares to fund their future growth. We can compare a company’s cash consumption to its market capitalization to get an idea of ââhow many new shares a company would need to issue to fund its one-year operations.
Bio-Gene Technology’s cash consumption of AU $ 1.8 million represents approximately 5.4% of its market capitalization of AU $ 34 million. 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 Bio-Gene Technology’s money-consuming situation?
It may already be obvious to you that we are relatively comfortable with how Bio-Gene technology burns its money. For example, we think its consumption of cash relative to its market capitalization suggests that the company is on the right track. Although its growing consumption of cash has not been significant, the other factors mentioned in this article more than make up for the weakness of this measure. Based on the factors mentioned in this article, we believe its cash-consuming situation deserves some attention from shareholders, but we don’t think they should be worried. On another note, we conducted a thorough investigation of the company and identified 4 warning signs for Bio-Gene technology (2 shouldn’t be ignored!) 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 interesting companies, and this list of growth stocks (according to analysts’ forecasts)
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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