We Think Diffusion Pharmaceuticals (NASDAQ:DFFN) Can Afford To Drive Business Growth

There’s no doubt that money can be made by owning shares of unprofitable businesses. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you’d have done very well indeed. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

NASDAQ:DFFN) shareholders be worried 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. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.” data-reactid=”29″>So should Diffusion Pharmaceuticals (NASDAQ:DFFN) shareholders be worried 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. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.

View our latest analysis for Diffusion Pharmaceuticals ” data-reactid=”30″> View our latest analysis for Diffusion Pharmaceuticals

How Long Is Diffusion Pharmaceuticals’ Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at June 2020, Diffusion Pharmaceuticals had cash of US$26m and no debt. Looking at the last year, the company burnt through US$11m. So it had a cash runway of about 2.3 years from June 2020. Arguably, that’s a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.

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How Is Diffusion Pharmaceuticals’ Cash Burn Changing Over Time?

our analyst forecasts for the company.” data-reactid=”50″>Because Diffusion Pharmaceuticals 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. With the cash burn rate up 10% 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. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Easily Can Diffusion Pharmaceuticals Raise Cash?

While Diffusion Pharmaceuticals does have a solid cash runway, its cash burn trajectory may have some shareholders thinking 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$62m, Diffusion Pharmaceuticals’ US$11m in cash burn equates to about 18% of its market value. As a result, we’d venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

So, Should We Worry About Diffusion Pharmaceuticals’ Cash Burn?

4 warning signs for Diffusion Pharmaceuticals (of which 1 is a bit unpleasant!) you should know about.” data-reactid=”55″>On this analysis of Diffusion Pharmaceuticals’ cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we’re not too worried about its rate of cash burn. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Diffusion Pharmaceuticals (of which 1 is a bit unpleasant!) you should know about.