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As the kr58m market cap Gabather AB (publ) (STO:GABA) released another year of negative earnings, investors may be on edge waiting for breakeven. 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. Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to raise further funds. This may not always be on good terms, which could hurt current shareholders if the new deal lowers the value of their shares. Gabather 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 Gabather
What is cash burn?
Gabather currently has kr9.8m in the bank, with negative free cash flow of -kr16.2m. The biggest threat facing Gabather investors is the company going out of business when it runs out of money and cannot raise any more capital. Not surprisingly, it is more common to find unprofitable companies in the fast-growth pharma industry. The industry is highly competitive, with companies racing to innovate at the risk of burning through their cash too fast.
When will Gabather need to raise more cash?
We can measure Gabather's ongoing cash expenditure requirements by looking at free cash flow, which I define as cash flow from operations minus fixed capital investment, is a measure of how much cash a company generates/loses each year.
Free cash outflows declined by 23% over the past year, which could be an indication of Gabather putting the brakes on ramping up high growth. However, the current level of cash is not enough to sustain Gabather’s operations and the company may need to raise more capital within the year. Even though this is analysis is fairly basic, and Gabather still can cut its overhead further, or borrow money instead of raising new equity capital, this analysis still helps us understand how sustainable the Gabather operation is, and when things may have to change.
Next Steps:
This analysis isn’t meant to deter you from Gabather, but rather, to help you better understand the risks involved investing in loss-making companies. Now you know that even if the company was to continue to shrink its cash burn at this rate, it will not be able to sustain its operations given the current level of cash reserves. The potential equity raising resulting from this means you might be able to get shares at a lower price if the company raises capital next. Keep in mind I haven't considered other factors such as how GABA is expected to perform in the future. You should continue to research Gabather to get a more holistic view of the company by looking at: