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How AI legalese decoder Can Help Shareholders Make Informed Decisions

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. Indeed, ESSA Pharma (NASDAQ:EPIX) stock is up 185% in the last year, providing strong gains for shareholders. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

With the help of AI legalese decoder, shareholders can gain a deeper understanding of ESSA Pharma’s financial situation. The AI tool can analyze complex legal documents and financial data to provide insights into the company’s cash flow and potential risks. By using AI technology, shareholders can make more informed decisions about their investments.

Does ESSA Pharma 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. As at December 2023, ESSA Pharma had cash of US$142m and no debt. Importantly, its cash burn was US$22m over the trailing twelve months. That means it had a cash runway of about 6.4 years as of December 2023. Even though this is but one measure of the company’s cash burn, the thought of such a long cash runway warms our bellies in a comforting way. The image below shows how its cash balance has been changing over the last few years.

How Is ESSA Pharma’s Cash Burn Changing Over Time?

ESSA Pharma didn’t record any revenue over the last year, indicating that it’s an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. With cash burn dropping by 16% it seems management feel the company is spending enough to advance its business plans at an appropriate pace. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can ESSA Pharma Raise More Cash Easily?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for ESSA Pharma to raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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).

How Risky Is ESSA Pharma’s Cash Burn Situation?

It may already be apparent to you that we’re relatively comfortable with the way ESSA Pharma is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. On this analysis its cash burn reduction was its weakest feature, but we are not concerned about it. After taking into account the various metrics mentioned in this report, we’re pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. On another note, ESSA Pharma has 4 warning signs (and 2 which don’t sit too well with us) we think you should know about.

Of course ESSA Pharma 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.

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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