Here’s why we’re not too worried about the silver-consuming situation at Argenica Therapeutics (ASX: AGN)
Just because a business isn’t making money doesn’t mean the stock will go down. For example, although Amazon.com suffered losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while the successes are well known, investors should not ignore the myriad of unprofitable companies that simply burn all their money and collapse.
So the natural question for Argenica Therapeutics (ASX: AGN) is whether they should be concerned about its rate of cash consumption. For the purposes of this article, we’ll define cash consumption as the amount of cash 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 Argenica Therapeutics
Does Argenica Therapeutics have a long cash flow trail?
You can calculate a company’s cash flow trail by dividing the amount of cash it has by the rate at which it spends that cash. As of June 2021, Argenica Therapeutics had A $ 7.1 million in cash and no debt. Looking at last year, the company spent A $ 1.0 million. So he had a cash flow trail of around 6.8 years from June 2021. While this is only a measure of his cash flow situation, it certainly gives us the impression that holders have nothing to fear. You can see how his cash balance has changed over time in the image below.
How does Argenica Therapeutics’ silver consumption change over time?
Although Argenica Therapeutics reported sales of AU $ 296,000 last year, it actually has no operating income. For us this makes it a pre-income business, so we will look at its cash consumption trajectory as an assessment of its cash consumption situation. Remarkably, it has actually increased its cash consumption by 938% over the past year. We certainly hope for the sake of shareholders that the money is well spent, because this kind of spending increase always makes us nervous. Admittedly, we are a little cautious of Argenica Therapeutics due to its lack of significant operating income. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How easily can Argenica Therapeutics raise funds?
Given its cash-consuming trajectory, Argenica Therapeutics shareholders might consider how easily it could raise more cash, despite its strong liquidity track. Businesses can raise capital through debt or equity. One of the main advantages of publicly traded companies is that they can sell stocks to investors to raise funds and finance their 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.
Argenica Therapeutics’ cash consumption of AU $ 1.0 million represents approximately 1.8% of its market capitalization of AU $ 59 million. So he could almost certainly borrow a little to finance another year’s growth, or he could easily raise cash by issuing a few shares.
How risky is Argenica Therapeutics’ cash burn situation?
It may already be obvious to you that we are relatively comfortable with the way Argenica Therapeutics burns its money. In particular, we believe that its cash flow track stands out as proof that the company has good control over its spending. While we find its growing cash consumption to be a bit negative, once we consider the other metrics mentioned in this article together, the overall picture is one we’re comfortable with. Looking at all of the metrics in this article, together, we’re not worried about its rate of cash consumption; the business appears to be well above its medium-term spending needs. On another note, we conducted a thorough investigation of the company and identified 4 warning signs for Argenica Therapeutics (1 is a bit nasty!) Which you should be aware of before investing here.
If you’d rather discover another business with better fundamentals, don’t miss this free list of interesting companies that have HIGH ROE and low debt or this list of stocks that are all expected to grow.
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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 any stock 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 documents. Simply Wall St has no position in any of the stocks mentioned.
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