There is no doubt that it is possible to make money by owning shares of unprofitable companies. In effect, Predictive discovery (ASX:PDI) The stock is up 101% over the past year, delivering solid gains for shareholders. That said, unprofitable businesses are risky because they could potentially burn all their money and get into trouble.
Given its strong share price performance, we think it’s worth considering for Predictive Discovery shareholders whether its cash burn is a concern. For the purposes of this article, we will define cash burn as the amount of money the business spends each year to fund its growth (also known as negative free cash flow). We will start by comparing its cash consumption with its cash reserves in order to calculate its cash trail.
Discover our latest analysis for Predictive Discovery
Does predictive discovery have a long cash trail?
You can calculate a company’s cash trail by dividing the amount of cash it has on hand by the rate at which it spends that money. When Predictive Discovery last published its balance sheet in December 2021, it had no debt and cash worth A$17 million. Last year, its cash burn was A$22 million. So it had a cash trail of about 10 months from December 2021. That’s a pretty short cash trail, indicating that the company either needs to reduce its annual cash burn or rebuild its cash. The image below shows how his cash balance has changed over the past few years.
How is Predictive Discovery’s cash burn changing over time?
Although Predictive Discovery recorded statutory income of AU$5,000 in the last year, he did not derive any income from operations. For us, that makes it a pre-revenue business, so we’ll look at its cash burn trajectory as an assessment of its cash burn situation. Soaring cash burn of 178% year over year is certainly testing our nerves. This type of spending growth rate cannot continue for very long before causing balance sheet weakness, generally speaking. Predictive Discovery makes us a bit nervous due to its lack of substantial operating revenue. We therefore generally prefer stocks from this list of stocks whose analysts predict growth.
How difficult would it be for predictive discovery to raise more cash for growth?
Given that its cash burn is headed in the wrong direction, Predictive Discovery shareholders may want to anticipate when the company may need to raise more cash. Issuing new shares or going into debt are the most common ways for a listed company to raise more funds for its business. Many companies end up issuing new shares to fund their future growth. We can compare a company’s cash burn to its market capitalization to get an idea of how many new shares a company would need to issue to fund a year’s operations.
Predictive Discovery’s cash burn of A$22 million represents approximately 7.9% of its market capitalization of A$277 million. This is a small proportion, so we think the company would be able to raise more cash to fund growth, with a bit of dilution, or even just borrow money.
How risky is Predictive Discovery’s cash burn situation?
Even though its growing cash burn makes us a little nervous, we are bound to mention that we thought Predictive Discovery’s cash burn relative to its market capitalization was quite promising. In summary, we believe that Predictive Discovery’s cash burn is a risk, based on the factors we’ve mentioned in this article. On a different note, we conducted a thorough investigation of the company and identified 5 Warning Signs for Predictive Discovery (3 are potentially serious!) that you should be aware of before investing here.
Sure, you might find a fantastic investment by looking elsewhere. So take a look at this free list of interesting companies, and this list of growth stocks (according to analyst forecasts)
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.