Business growth

We believe Ocuphire Pharma (NASDAQ:OCUP) needs to carefully drive its business growth

There is no doubt that it is possible to make money by owning shares of unprofitable companies. For example, although Amazon.com posted losses for many years after it listed, if you had bought and held the stock since 1999, you would have made a fortune. But while history boasts of these rare successes, those who fail are often forgotten; who remembers Pets.com?

So should Ocuphire Pharma (NASDAQ:OCUP) Are shareholders worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable business spends money to finance its growth; its negative free cash flow. Let’s start with a review of the company’s cash flow, relative to its cash burn.

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When could Ocuphire Pharma run out of money?

A cash trail is defined as the length of time it would take a business to run out of cash if it continued to spend at its current rate of cash consumption. When Ocuphire Pharma last published its balance sheet in June 2022, it had no debt and cash worth $17 million. Looking at last year, the company burned 19 million US dollars. It therefore had a cash trail of approximately 11 months from June 2022. Notably, analysts predict that Ocuphire Pharma will break even (at the level of free cash flow) in approximately 3 years. Essentially, this means the business will reduce its cash burn or need more cash. Below you can see how its liquidity has changed over time.

NasdaqCM: Historical OCUP Debt to Equity October 8, 2022

How is Ocuphire Pharma’s cash burn changing over time?

While it’s great to see that Ocuphire Pharma has already started generating revenue from operations, last year it only produced US$489,000, so we don’t believe it’s generating revenue. significant at this stage. Therefore, we believe it is a little early to focus on revenue growth, so we will limit ourselves to looking at how cash burn has evolved over time. With a cash burn rate up 13% over the past year, it looks like the company is increasing its investment in the business over time. This isn’t necessarily a bad thing, but investors should be aware that it will shorten the cash trail. Obviously, however, the crucial factor is whether the company will expand its business in the future. For this reason, it makes a lot of sense to take a look at our analysts’ forecasts for the company.

How easily can Ocuphire Pharma raise funds?

Given its cash burn trajectory, Ocuphire Pharma shareholders should already be thinking about how easily it might be possible for it to raise more cash in the future. Companies can raise capital either through debt or equity. One of the main advantages of publicly traded companies is that they can sell shares to investors to raise funds and finance their 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.

Ocuphire Pharma has a market capitalization of $48 million and spent $19 million last year, or 40% of the company’s market value. These are high expenses relative to the value of the entire company, so if it has to issue stock to fund further growth, it could end up hurting shareholder returns significantly (through significant dilution).

How risky is Ocuphire Pharma’s cash burn situation?

Ocuphire Pharma is not in a great position with respect to its cash burn position. While we can understand if some shareholders find its growing cash burn acceptable, we can’t ignore the fact that we view its cash burn relative to its market capitalization as downright troublesome. A real bright spot is that analysts expect the company to break even. Looking at the factors mentioned in this short report, we think its cash burn is a bit risky, and that makes us slightly nervous about the stock. On another note, Ocuphire Pharma has 5 warning signs (and 2 that we don’t like too much) that we think you should know about.

Sure Ocuphire Pharma may not be the best stock to buy. So you might want to see this free collection of companies offering a high return on equity, or this list of stocks that insiders buy.

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.

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