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 while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So should Biofrontera (NASDAQ:BFRI) shareholders be worried about its cash burn? In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.
How Long Is Biofrontera's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2021, Biofrontera had cash of US$3.1m and no debt. In the last year, its cash burn was US$6.0m. Therefore, from June 2021 it had roughly 6 months of cash runway. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.NasdaqCM:BFRI Debt to Equity History October 14th 2021
How Well Is Biofrontera Growing?
Happily, Biofrontera is travelling in the right direction when it comes to its cash burn, which is down 76% over the last year. Unfortunately, however, operating revenue dropped 14% during the same time frame. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Biofrontera is building its business over time.
How Easily Can Biofrontera Raise Cash?
Since Biofrontera revenue has been falling, the market will likely be considering how it can raise more cash if need be. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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).
Biofrontera's cash burn of US$6.0m is about 13% of its US$48m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
Is Biofrontera's Cash Burn A Worry?
On this analysis of Biofrontera's cash burn, we think its cash burn reduction was reassuring, while its cash runway has us a bit worried. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. Separately, we looked at different risks affecting the company and spotted 5 warning signs for Biofrontera (of which 3 make us uncomfortable!) you should know about.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
In This StoryBFRI
Latest Nasdaq-Listed Companies Videos
- Shareholders Will Probably Hold Off On Increasing Microsoft Corporation's (NASDAQ:MSFT) CEO Compensation For The Time Being
- Altimeter is on track to Grab its target
- Insiders at NRx Pharmaceuticals, Inc. (NASDAQ:NRXP) must be relieved they sold stock as market valuation descends to US$268m
- This Insider Has Just Sold Shares In SoFi Technologies, Inc. (NASDAQ:SOFI)