Companies Like Microba Life Sciences (ASX:MAP) Are In A Position To Invest In Growth

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Microba Life Sciences (ASX:MAP) 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'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Microba Life Sciences

When Might Microba Life Sciences Run Out Of Money?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at December 2022, Microba Life Sciences had cash of AU$42m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was AU$14m. So it had a cash runway of about 3.0 years from December 2022. There's no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.

How Well Is Microba Life Sciences Growing?

Some investors might find it troubling that Microba Life Sciences is actually increasing its cash burn, which is up 50% in the last year. The revenue growth of 9.5% gives a ray of hope, at the very least. Considering both these factors, we're not particularly excited by its growth profile. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

Can Microba Life Sciences Raise More Cash Easily?

Microba Life Sciences seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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).

Since it has a market capitalisation of AU$135m, Microba Life Sciences' AU$14m in cash burn equates to about 10% of its market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

So, Should We Worry About Microba Life Sciences' Cash Burn?

On this analysis of Microba Life Sciences' cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Microba Life Sciences (1 shouldn't be ignored!) that you should be aware of before investing here.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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