Just because a business isn’t making money doesn’t mean the stock will go down. For example, biotech and mineral exploration companies often lose money for years before they are successful with a new treatment or mining discovery. But the harsh reality is that so many loss-making companies burn all their cash and go bankrupt.
So should PAVmed (NASDAQ: PAVM) Are Shareholders Worried About Its Consumption of Cash? In this article, we define cash consumption as its annual (negative) free cash flow, which is the amount of money a business spends each year to finance its growth. The first step is to compare its cash consumption with its cash reserves, to give us its “cash flow track”.
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When might PAVmed run out of money?
A company’s cash flow track is the time it would take to spend its cash reserves at its current burn rate. As of March 2021, PAVmed had US $ 49 million in cash and debt so minimal that we can ignore it for the purposes of this analysis. Looking at last year, the company burned US $ 27 million. It therefore had a cash flow trail of around 21 months from March 2021. Importantly, analysts believe that PAVmed will reach cash flow in 5 years. This means that unless the company quickly cuts its cash consumption, it may well be looking to raise more cash. Below you can see how his cash holdings have evolved over time.
How does PAVmed’s cash consumption change over time?
Since PAVmed is not currently generating revenue, we consider it to be an early stage business. So while we can’t look to sales to understand growth, we can look at how cash consumption changes to understand how spending changes over time. In fact, it has sharply increased its spending over the past year, increasing cash consumption by 106%. This type of spending growth rate cannot last very long before causing general weakness in the balance sheet. If the past is always worth studying, it is the future that matters most. For this reason, it makes a lot of sense to take a look at our analysts’ forecasts for the business.
How easily can PAVmed raise cash?
While PAVmed has a strong cash trail, its cash-consuming trajectory may cause some shareholders to think ahead of when the company may need to raise more cash. The issuance of new shares or indebtedness are the most common ways for a listed company to raise more funds for its activities. One of the main advantages of publicly traded companies is that they can sell stocks to investors to raise cash and finance growth. By looking at a company’s cash consumption relative to its market capitalization, we get an idea of shareholder dilution if the company needed to raise enough cash to cover another year’s cash consumption.
PAVmed’s cash consumption of US $ 27 million represents approximately 7.7% of its market capitalization of US $ 354 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.
Is PAVmed’s Cash Burn a concern?
Based on this analysis of PAVmed’s cash consumption, we think its cash consumption relative to its market capitalization was reassuring, while its growing cash consumption worries us a little. One real bright spot is that analysts predict the company will break even. While we’re the kind of investors who are always a bit concerned about the risks of companies that burn cash, the metrics we’ve discussed in this article leave us relatively comfortable with PAVmed’s situation. Separately, we examined different risks affecting the business and identified 3 warning signs for PAVmed (of which 1 is significant!) that you should know.
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