Even when a business loses money, it is possible for shareholders to make money if they buy a quality business at the right price. Biotech and mining exploration companies, for example, typically lose money for years before succeeding with new treatments or the discovery of minerals. However, only a fool would ignore the risk of a loss-making company burning through cash too quickly.
Given this risk, we thought we’d see if Kodiak Science (NASDAQ: KOD ) shareholders should worry about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let’s start by examining business cash and its cash burn.
Check out our latest analysis for Kodiak Sciences
When will Kodiak Sciences run out of money?
A company’s cash runway is the time it takes to deplete its cash reserves at the current cash burn rate. As of September 2022, Kodiak Sciences has $537 million in cash and no debt. Last year, its cash burn was $263 million. That means it has roughly 2.0 years of cash runway as of September 2022. It’s a prudent and sensible runway length, so to speak. As you can see in the chart below, you can see how its cash holdings have changed over time.
How has Kodiak Sciences’ cash burn changed over time?
Kodiak Sciences didn’t record any revenue last year, suggesting it’s an early-stage company that’s still growing its business. So, while we can’t look at sales to understand growth, we can look at changes in cash burn to see spending trends over time. With cash burn rising 27% last year, the company appears to be gradually investing more in the business. However, if spending continues to increase, the company’s true cash runway will therefore be shorter than suggested above. The past is always worth studying, but most importantly the future. So you might want to see how much the company is projected to grow over the next few years.
Can Kodiak Sciences easily raise more cash?
While Kodiak Sciences does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead about when the company might need to raise more cash. Companies can raise capital through debt or equity. One of the main advantages of public companies is that they can sell shares to investors to raise cash and fund growth. By looking at a company’s cash burn relative to its market capitalization, we can get an idea of how much shareholder dilution will occur if the company needs to raise enough cash to cover the next year’s cash burn.
With a market cap of $404 million, Kodiak Sciences’ $263 million cash burn equates to about 65% of its market cap. Given how large the cash burn is, we view it as a high-risk stock with a high chance of dilution relative to the market value of the overall company.
How Dangerous Is Kodiak Sciences’ Cash Burn?
While its cash burn relative to its market cap makes us a little nervous, we have to mention that we think Kodiak Sciences’ cash runway is relatively promising. Judging by the factors mentioned in this short report, we do think its cash burn is a bit risky, which does make us slightly nervous about the stock.On the other hand, we conducted an in-depth investigation of the company and determined that 2 Warning Signs of Kodiak Sciences (1 is important!) What you should know before investing here.
certainly Kodiak Sciences Might Not Be the Best Stock. so you might want to see this free A collection of companies with high returns on equity, or this list of stocks insiders are buying.
What are the risks and opportunities Kodiak Science?
Income less than $1 million ($0)
Currently unprofitable and not expected to be profitable for the next 3 years
View all risks and rewards
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This article by Simply Wall St is general in nature. We use only an unbiased methodology to provide reviews based on historical data and analyst forecasts, 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 objectives or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any of the stocks mentioned.