In the most recent twelve months, Tetra Bio-Pharma Inc’s (TSXV:TBP) earnings loss has accumulated to -$3.51M. Although some investors expected this, their belief in the path to profitability for TBP may be wavering. A crucial question to bear in mind when you’re an investor of an unprofitable business, is whether the company will have to raise more capital in the near future. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that TBP is spending more money than it earns, it will need to fund its expenses via external sources of capital. Looking at TBP’s latest financial data, I will gauge when the company may run out of cash and need to raise more money. View our latest analysis for Tetra Bio-Pharma
What is cash burn?
TBP currently has $2.70M in the bank, with negative cash flows from operations of -$3.44M. Since it is spending more money than it makes, the business is “burning” through its cash to run its day-to-day operations. How fast TBP runs down its cash supply over time is known as the cash burn rate. The most significant threat facing TBP’s investor 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 high-growth biotech industry. These businesses operate in a highly competitive environment and face running down its cash holdings too fast in order to keep up with innovation.
TSXV:TBP Income Statement Oct 20th 17
When will TBP need to raise more cash?
Operational expenses, or opex for short, are the bare minimum expenses for TBP to continue its operations. It covers things such as TBP’s employee salaries, rent and basic R&D expenses incurred within this year. Opex (excluding one-offs) grew by 94.06% over the past year, which is considerably high. Not surprisingly, if TBP continues to ramp up expenditure at this rate for the upcoming year, it’ll likely need to come to market within the next few months, given the its current level of cash reserves. This is also the case if TBP maintains its opex level of $3.9M, without growth, going forward. Although this is a relatively simplistic calculation, and TBP may reduce its costs or open a new line of credit instead of issuing new equity shares, the analysis still helps us understand how sustainable the TBP’s operation is, and when things may have to change.
What this means for you:
Are you a shareholder? If TBP makes up a reasonable portion of your portfolio, it’s always wise to consider cushioning your holdings with less risky, profitable stocks. Hopefully, the analysis has shed some light on the risks you should bear in mind as a shareholder of TBP, in particular, its tight cash runway moving forward. Keep in mind that opex is only one side of the coin. I recommend also looking at TBP’s revenues in order to forecast when the company will become breakeven and start producing profits for shareholders.
Are you a potential investor? This analysis isn’t meant to deter you from buying TBP, but rather, to help you better understand the risks involved investing in loss-making companies. The outcome of my analysis suggests that if TBP maintains the rate of opex growth, it will run out of cash within the year. The potential equity raising resulting from this means you could potentially get a better deal on the share price when the company raises capital next.
Good management manages cash well – take a look at who sits on TBP’s board and the CEO’s back ground and experience here. If risky loss-making stocks do not appeal to you, see