While we like hard rules, there are often no hard rules in finance. Everything must be viewed on a case-by-case basis. Especially when it comes to working capital, as I have been discussing. 

This weekend, I was running quant screens to identify potential value names, more to come, and when I pre-maturely screened for names, an interesting thought came up. I was screening for value names, yet, I saw a list of hundreds of healthcare companies, specifically biopharma, with sky-high cash burn (how fast the company was consuming cash to continue to operate); not as much value as I anticipated.  

I was looking for companies where assets could be bought at a bargain to their liquidation value, a.k.a buying assets at a steep discount, something like $0.66 for $1 worth of assets. This begs the question, is positive working capital always a sign of financial strength? No. Is buying assets on a discount to liquidation always a steal? No, especially not if the drug pipeline is limited and there exists development risk. 

Below, we can see that the companies are a reflection of business strategy as opposed to financial strength/outperformance. Pharma companies rely on equity infusion (capital from venture capitalist) to bring potential ideas closer to market. These companies are fundamentally in their development stages burning through cash on research and development costs. As a result, equity investors are often their lifeline, making their working capital figures inflated. Lots of cash, little debt/financial obligations. Looks healthy at the surface level. Until you expose the risk in the cash burn.