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Trailing twelve-month data shows us that CStone Pharmaceuticals's (HKG:2616) earnings loss has accumulated to -CN¥1.2b. Although some investors expected this, their belief in the path to profitability for CStone Pharmaceuticals may be wavering. Savvy investors should always reassess the situation of loss-making companies frequently, and keep informed about whether or not these businesses are in a strong cash position. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that CStone Pharmaceuticals is spending more money than it earns, it will need to fund its expenses via external sources of capital. CStone Pharmaceuticals may need to come to market again, but the question is, when? Below, I’ve analysed the most recent financial data to help answer this question.
Check out our latest analysis for CStone Pharmaceuticals
What is cash burn?
CStone Pharmaceuticals currently has CN¥3.4b in the bank, with negative free cash flow of -CN¥799.0m. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Not surprisingly, it is more common to find unprofitable companies in the high-growth biotech industry. These businesses operate in a highly competitive environment and face running down its cash holdings too fast in order to keep up with innovation.
When will CStone Pharmaceuticals need to raise more cash?
One way to measure the cost to CStone Pharmaceuticals of keeping the business running, is by using free cash flow (which I define as cash flow from operations minus fixed capital investment).
In CStone Pharmaceuticals’s case, its cash outflows fell by 62% last year, which may signal the company moving towards a more sustainable level of expenses. If free cash outflows are maintained at the current level of -CN¥799.0m, then given the current level of cash in the bank, CStone Pharmaceuticals will not need to raise capital any time within the next three years. Although this is a relatively simplistic calculation, and CStone Pharmaceuticals may continue to reduce its costs further or borrow money instead of raising new equity capital, this analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.
Next Steps:
The risks involved in investing in loss-making CStone Pharmaceuticals means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. The cash burn analysis result indicates a cash constraint for the company, due to its current level of cash reserves. An opportunity may exist for you to enter into the stock at an attractive price, should CStone Pharmaceuticals come to market to fund its operations. This is only a rough assessment of financial health, and 2616 likely also has company-specific issues impacting its cash management decisions. I recommend you continue to research CStone Pharmaceuticals to get a better picture of the company by looking at: