Here's Why Hancock Jaffe Laboratories (NASDAQ:HJLI) Must Use Its Cash Wisely

Just because a business does not make any money, does not mean that the stock will go down. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Hancock Jaffe Laboratories (NASDAQ:HJLI) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Let's start with an examination of the business's cash, relative to its cash burn.

Check out our latest analysis for Hancock Jaffe Laboratories

Does Hancock Jaffe Laboratories Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Hancock Jaffe Laboratories last reported its balance sheet in March 2020, it had zero debt and cash worth US$720k. In the last year, its cash burn was US$5.9m. So it had a cash runway of approximately 1 months from March 2020. To be frank we are alarmed by how short that cash runway is! Depicted below, you can see how its cash holdings have changed over time.

How Is Hancock Jaffe Laboratories's Cash Burn Changing Over Time?

Because Hancock Jaffe Laboratories isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. As it happens, the company's cash burn reduced by 5.1% over the last year, which suggests that management may be mindful of the risks of their depleting cash reserves. 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 Hancock Jaffe Laboratories Raise More Cash Easily?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Hancock Jaffe Laboratories to raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Hancock Jaffe Laboratories's cash burn of US$5.9m is about 59% of its US$10m market capitalisation. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.

So, Should We Worry About Hancock Jaffe Laboratories's Cash Burn?

There are no prizes for guessing that we think Hancock Jaffe Laboratories's cash burn is a bit of a worry. Take, for example, its cash runway, which suggests the company may have difficulty funding itself, in the future. And although we accept its cash burn reduction wasn't as worrying as its cash runway, it was still a real negative; as indeed were all the factors we considered in this article. The measures we've considered in this article lead us to believe its cash burn is actually quite concerning, and its weak cash position seems likely to cost shareholders one way or another. On another note, we conducted an in-depth investigation of the company, and identified 6 warning signs for Hancock Jaffe Laboratories (3 shouldn't be ignored!) that you should be aware of before investing here.

Of course Hancock Jaffe Laboratories may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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This article by Simply Wall St is general in nature. 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. Thank you for reading.