Here's Why We're A Bit Worried About Moleculin Biotech's (NASDAQ:MBRX) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

NASDAQ:MBRX) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.” data-reactid=”29″>So, the natural question for Moleculin Biotech (NASDAQ:MBRX) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Moleculin Biotech ” data-reactid=”30″>See our latest analysis for Moleculin Biotech

Does Moleculin Biotech Have A Long Cash Runway?

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 March 2020, Moleculin Biotech had cash of US$12m and no debt. Looking at the last year, the company burnt through US$18m. That means it had a cash runway of around 8 months as of March 2020. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. Depicted below, you can see how its cash holdings have changed over time.

How Is Moleculin Biotech’s Cash Burn Changing Over Time?

how much the company is expected to grow in the next few years.” data-reactid=”50″>Because Moleculin Biotech isn’t currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Over the last year its cash burn actually increased by 30%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company’s true cash runway will therefore be shorter than suggested above, if spending continues to increase. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Hard Would It Be For Moleculin Biotech To Raise More Cash For Growth?

Given its cash burn trajectory, Moleculin Biotech shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Moleculin Biotech’s cash burn of US$18m is about 27% of its US$66m market capitalisation. That’s fairly notable cash burn, so if the company had to sell shares to cover the cost of another year’s operations, shareholders would suffer some costly dilution.

So, Should We Worry About Moleculin Biotech’s Cash Burn?

5 warning signs for Moleculin Biotech (of which 1 can’t be ignored!) you should know about.” data-reactid=”55″>We must admit that we don’t think Moleculin Biotech is in a very strong position, when it comes to its cash burn. While its cash burn relative to its market cap wasn’t too bad, its cash runway does leave us rather nervous. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. Separately, we looked at different risks affecting the company and spotted 5 warning signs for Moleculin Biotech (of which 1 can’t be ignored!) you should know about.