Trailing twelve-month data shows us that Allogene Therapeutics, Inc.'s (NASDAQ:ALLO) earnings loss has accumulated to -US$146.8m. Although some investors expected this, their belief in the path to profitability for Allogene Therapeutics may be wavering. The single most important question to ask when you’re investing in a loss-making company is – will it need to raise cash again, and if so, when? This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that Allogene Therapeutics is spending more money than it earns, it will need to fund its expenses via external sources of capital. Allogene Therapeutics may need to come to market again, but the question is, when? Below, I’ve analysed the most recent financial data to help answer this question.
What is cash burn?
With a negative free cash flow of -US$114.7m, Allogene Therapeutics is chipping away at its US$502m cash reserves in order to run its business. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Not surprisingly, it is more common to find unprofitable companies in the high-growth biotech industry. The industry is highly competitive, with companies racing to innovate at the risk of burning through their cash too fast.
When will Allogene Therapeutics need to raise more cash?
We can measure Allogene Therapeutics's ongoing cash expenditure requirements by looking at free cash flow, which I define as cash flow from operations minus fixed capital investment, is a measure of how much cash a company generates/loses each year.
In Allogene Therapeutics’s case, its cash outflows fell by 116% last year, which may signal the company moving towards a more sustainable level of expenses. If the company does not increase its cash burn next year and remains at the current level of -US$114.7m, then it should not need to raise further capital for the next few years. Although this is a relatively simplistic calculation, and Allogene Therapeutics may continue to reduce its costs further or borrow money instead of raising new equity capital, this analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.
The risks involved in investing in loss-making Allogene Therapeutics means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. Now you know that even if the company was to continue to shrink its cash burn at its current rate, it will not be able to sustain its operations given the current level of cash reserves. The potential equity raising resulting from this means you might get a better deal on the share price if the company the company raises capital again. I admit this is a fairly basic analysis for ALLO's financial health. Other important fundamentals need to be considered as well. I suggest you continue to research Allogene Therapeutics to get a more holistic view of the company by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ALLO’s future growth? Take a look at our free research report of analyst consensus for ALLO’s outlook.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Allogene Therapeutics’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 30 June 2019. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.
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