Companies Like CollPlant Biotechnologies (NASDAQ:CLGN) Can Afford To Invest In Growth

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editorial-team@simplywallst.com (Simply Wall St)

Sat, Nov 9, 2024, 7:32 AM 4 min read

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So, the natural question for CollPlant Biotechnologies (NASDAQ:CLGN) shareholders is whether they should be concerned by its rate of 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for CollPlant Biotechnologies

How Long Is CollPlant Biotechnologies' Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When CollPlant Biotechnologies last reported its June 2024 balance sheet in August 2024, it had zero debt and cash worth US$19m. Looking at the last year, the company burnt through US$3.5m. Therefore, from June 2024 it had 5.4 years of cash runway. Importantly, though, analysts think that CollPlant Biotechnologies will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis — NasdaqGM:CLGN Debt to Equity History November 9th 2024

How Is CollPlant Biotechnologies' Cash Burn Changing Over Time?

In our view, CollPlant Biotechnologies doesn't yet produce significant amounts of operating revenue, since it reported just US$689k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. The 76% reduction in its cash burn over the last twelve months may be good for protecting the balance sheet but it hardly points to imminent growth. 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 Hard Would It Be For CollPlant Biotechnologies To Raise More Cash For Growth?

There's no doubt CollPlant Biotechnologies' rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. 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. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

CollPlant Biotechnologies' cash burn of US$3.5m is about 8.1% of its US$43m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is CollPlant Biotechnologies' Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way CollPlant Biotechnologies is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. But it's fair to say that its cash burn relative to its market cap was also very reassuring. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Taking a deeper dive, we've spotted 3 warning signs for CollPlant Biotechnologies you should be aware of, and 1 of them makes us a bit uncomfortable.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies with significant insider holdings, and this list of stocks growth stocks (according to analyst forecasts)

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.