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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for Onconova Therapeutics (NASDAQ:ONTX) shareholders is whether they should be concerned by its rate of 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Check out our latest analysis for Onconova Therapeutics
How Long Is Onconova Therapeutics' Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Onconova Therapeutics last reported its balance sheet in March 2022, it had zero debt and cash worth US$51m. Looking at the last year, the company burnt through US$19m. That means it had a cash runway of about 2.6 years as of March 2022. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.
How Is Onconova Therapeutics' Cash Burn Changing Over Time?
In our view, Onconova Therapeutics doesn't yet produce significant amounts of operating revenue, since it reported just US$226k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. With cash burn dropping by 16% it seems management feel the company is spending enough to advance its business plans at an appropriate pace. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Easily Can Onconova Therapeutics Raise Cash?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Onconova Therapeutics to raise more cash in the future. Companies can raise capital through either debt or equity. 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.