Recce Pharmaceuticals (ASX: RCE) is well positioned to deliver on its growth plans

It is easy to understand why investors are attracted to unprofitable companies. For example, Pharmaceutical Receipt (ASX: RCE) shareholders performed very well last year, with the share price soaring 224%. But while history praises these rare successes, those that fail are often forgotten; who remembers

Given the strong performance of its share price, we believe it is worth asking the shareholders of Recce Pharmaceuticals if its cash consumption is of concern. In this article, we define cash consumption as its annual (negative) free cash flow, that is, the amount that a company spends each year to finance its growth. The first step is to compare its cash consumption with its cash reserves, to give us its “cash flow track”.

See our latest review for Recce Pharmaceuticals

Does Recce Pharmaceuticals have a long cash flow trail?

A cash flow trail is defined as the time it would take a business to run out of cash if it continued to spend at its current rate of cash consumption. As of December 2020, Recce Pharmaceuticals had AUS $ 24 million in cash and no debt. Importantly, his cash consumption was A $ 7.7 million in the past twelve months. Therefore, as of December 2020, he had 3.1 years of cash flow. A lead of this length gives the company the time and space it needs to develop its business. Pictured below, you can see how his cash holdings have changed over time.

ASX Debt to Equity History: RCE March 8, 2021

How does Recce Pharmaceuticals’ silver consumption change over time?

Although Recce Pharmaceuticals reported sales of AU $ 690,000 last year, it actually has no operating income. For us this makes it a pre-income business, so we will look at its cash consumption trajectory as an assessment of its cash consumption situation. The dizzying 155% year-over-year increase in cash is certainly testing our nerves. It’s fair to say that some sort of rate of increase cannot be sustained for very long without putting pressure on the balance sheet. Admittedly, we are a little cautious of Recce Pharmaceuticals due to their lack of significant operating income. We therefore generally prefer the actions of this list of stocks that analysts predict will grow.

How difficult would it be for Recce Pharmaceuticals to raise more cash for growth?

Given its cash-consuming trajectory, shareholders of Recce Pharmaceuticals may want to consider how easily it could raise more cash, despite its strong cash track. Generally speaking, a listed company can raise new liquidity by issuing shares or going into debt. Many companies end up issuing new shares to finance their future growth. By looking at a company’s cash consumption relative to its market capitalization, we get an idea of ​​how many shareholders would be diluted if the company needed to raise enough cash to cover a company’s cash consumption. other year.

Recce Pharmaceuticals has a market capitalization of A $ 170 million and spent A $ 7.7 million last year, which is 4.5% of the company’s market value. Given that this is a rather small percentage, it would probably be very easy for the company to finance the growth of another year by issuing new shares to investors, or even taking out a loan.

How risky is Recce Pharmaceuticals’ cash position?

As you can probably see by now, we’re not too worried about Recce Pharmaceuticals’ cash consumption. In particular, we believe that its cash flow track stands out as proof that the company has good control over its spending. While we find its growing cash consumption to be a bit negative, once we consider the other metrics mentioned in this article together, the overall picture is one we’re comfortable with. After taking into account the various metrics mentioned in this report, we are quite comfortable with the way the business is spending its money, as it appears to be on track to meet its medium term needs. Separately, we examined different risks affecting the business and identified 3 warning signs for Recce Pharmaceuticals (2 of which don’t sit too well with us!) you should know.

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