There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we'd take a look at whether Cognition Therapeutics (NASDAQ:CGTX) shareholders should be worried about its cash burn. 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). Let's start with an examination of the business' cash, relative to its cash burn.
See our latest analysis for Cognition Therapeutics
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at September 2024, Cognition Therapeutics had cash of US$22m and no debt. Looking at the last year, the company burnt through US$26m. That means it had a cash runway of around 10 months as of September 2024. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. You can see how its cash balance has changed over time in the image below.
Cognition Therapeutics didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. With the cash burn rate up 23% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
Since its cash burn is moving in the wrong direction, Cognition Therapeutics shareholders may wish to think ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.
Since it has a market capitalisation of US$20m, Cognition Therapeutics' US$26m in cash burn equates to about 127% of its market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.
We must admit that we don't think Cognition Therapeutics is in a very strong position, when it comes to its cash burn. Although we can understand if some shareholders find its increasing cash burn acceptable, we can't ignore the fact that we consider its cash burn relative to its market cap to be downright troublesome. Once we consider the metrics mentioned in this article together, we're left with very little confidence in the company's ability to manage its cash burn, and we think it will probably need more money. Taking a deeper dive, we've spotted 7 warning signs for Cognition Therapeutics you should be aware of, and 3 of them are potentially serious.
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