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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?
So should Heidelberg Pharma (ETR:HPHA) 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for Heidelberg Pharma
How Long Is Heidelberg Pharma's 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. In August 2024, Heidelberg Pharma had €37m in cash, and was debt-free. In the last year, its cash burn was €30m. That means it had a cash runway of around 14 months as of August 2024. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. You can see how its cash balance has changed over time in the image below.
How Well Is Heidelberg Pharma Growing?
On balance, we think it's mildly positive that Heidelberg Pharma trimmed its cash burn by 14% over the last twelve months. Unfortunately, however, operating revenue declined by 10% during the period. In light of the data above, we're fairly sanguine about the business growth trajectory. 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.
Can Heidelberg Pharma Raise More Cash Easily?
Even though it seems like Heidelberg Pharma is developing its business nicely, we still like to consider how easily it could raise more money to accelerate 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 comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Since it has a market capitalisation of €102m, Heidelberg Pharma's €30m in cash burn equates to about 30% of its market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.