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We think Kodiak Sciences (NASDAQ:KOD) needs to carefully drive its business growth

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Even when a company loses money, it is possible for shareholders to make money if they buy a good company at the right price. For example, biotechnology and mining exploration companies often lose money for years before succeeding with a new treatment or mineral discovery. However, only a fool would ignore the risk of a loss-making company burning through its cash too quickly.

Given this risk, we thought we would examine whether Kodiak Science (NASDAQ:KOD) shareholders should be concerned 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.

See our latest analysis for Kodiak Sciences

When could Kodiak Sciences run out of money?

A company’s cash track is the time it would take to deplete its cash reserves at its current rate of cash consumption. As of September 2022, Kodiak Sciences had cash of US$537 million and no debt. Last year, its cash burn was $263 million. That means it had a cash trail of around 2.0 years in September 2022. Arguably, that’s a conservative and reasonable runway length to have. Below you can see how its liquidity has changed over time.

debt-equity-history-analysis
NasdaqGM: History of KOD Debt to Equity January 4, 2023

How is Kodiak Sciences’ cash burn changing over time?

Kodiak Sciences has not recorded any revenue in the last year, indicating that it is a start-up company that is still growing its business. So, while we can’t look to sales to understand growth, we can look at cash burn trends to understand spending trends over time. With a cash burn rate up 27% over the past year, it looks like the company is increasing its investment in the business over time. However, the company’s true cash trail will therefore be shorter than suggested above, if expenses continue to rise. While the past is always worth studying, it is the future that matters most. You might want to take a look at the company’s expected growth over the next few years.

Can Kodiak Sciences raise more money easily?

Although Kodiak Sciences has a strong cash trail, its cash burn trajectory may cause some shareholders to think ahead to when the company might need to raise more cash. 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. By looking at a company’s cash burn relative to its market capitalization, we gain insight into how much of a shareholder base would be diluted if the company needed to raise enough cash to cover a company’s cash burn. another year.

With a market capitalization of $404 million, Kodiak Sciences’ cash burn of $263 million is about 65% of its market value. Given the scale of this cash burn relative to the market value of the entire company, we would consider this a high-risk stock, with the real possibility of extreme dilution. .

How risky is Kodiak Sciences’ cash burn situation?

Even though its cash burn relative to its market capitalization makes us a bit nervous, we are bound to mention that we thought Kodiak Sciences’ cash trail was relatively promising. 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 a different note, we conducted a thorough investigation of the company and identified 2 warning signs for Kodiak Sciences (1 is significant!) which you should be aware of before investing here.

Sure Kodiak Sciences 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.

What are the risks and opportunities for Kodiak Science?

Kodiak Sciences Inc., a clinical-stage biopharmaceutical company, researches, develops and markets therapeutic products to treat diseases of the retina.

See the full analysis

Risks

  • Generates less than $1 million in revenue ($0)

  • Currently unprofitable and not expected to become profitable within the next 3 years

See all risks and rewards

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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