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There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for Organovo Holdings (NASDAQ:ONVO) 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
See our latest analysis for Organovo Holdings
How Long Is Organovo Holdings' Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at March 2022, Organovo Holdings had cash of US$29m and no debt. Looking at the last year, the company burnt through US$8.9m. Therefore, from March 2022 it had 3.2 years of cash runway. There's no doubt that this is a reassuringly long runway. Depicted below, you can see how its cash holdings have changed over time.
How Is Organovo Holdings' Cash Burn Changing Over Time?
In our view, Organovo Holdings doesn't yet produce significant amounts of operating revenue, since it reported just US$1.5m in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Even though it doesn't get us excited, the 35% reduction in cash burn year on year does suggest the company can continue operating for quite some time. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Organovo Holdings is building its business over time.
How Easily Can Organovo Holdings Raise Cash?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Organovo Holdings to raise more cash in the future. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.
Organovo Holdings has a market capitalisation of US$21m and burnt through US$8.9m last year, which is 42% of the company's market value. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).