As the US$213m market cap Calithera Biosciences, Inc. (NASDAQ:CALA) released another year of negative earnings, investors may be on edge waiting for breakeven. 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? Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to raise further funds. This may not always be on good terms, which could hurt current shareholders if the new deal lowers the value of their shares. Calithera Biosciences 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?
Currently, Calithera Biosciences has US$153m in cash holdings and producing negative free cash flow of -US$71.3m. The biggest threat facing Calithera Biosciences investors is the company going out of business when it runs out of money and cannot raise any more capital. Not surprisingly, it is more common to find unprofitable companies in the high-growth biotech industry. These companies face the trade-off between running the risk of depleting its cash reserves too fast, or falling behind competition on innovation and gaining market share by investing too slowly.
When will Calithera Biosciences need to raise more cash?
When negative, free cash flow (which I define as cash from operations minus fixed capital investment) can be an effective measure of how much Calithera Biosciences has to spend each year in order to keep its business running.
In Calithera Biosciences’s case, its cash outflows fell by 55% last year, which may signal the company moving towards a more sustainable level of expenses. Though, if the company kept its cash burn level at -US$71.3m, it may not need to raise capital for another 2.1 years. Although this is a relatively simplistic calculation, and Calithera Biosciences may continue to reduce its costs further or borrow money instead of raising new equity capital, the outcome of 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.
This analysis isn’t meant to deter you from Calithera Biosciences, but rather, to help you better understand the risks involved investing in loss-making companies. Now you know that even if the company was to continue to shrink its cash burn at this 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 be able to get shares at a lower price if the company raises capital next. I admit this is a fairly basic analysis for CALA's financial health. Other important fundamentals need to be considered as well. I recommend you continue to research Calithera Biosciences to get a better picture of the company by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CALA’s future growth? Take a look at our free research report of analyst consensus for CALA’s outlook.
- Valuation: What is CALA worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CALA is currently mispriced by the market.
- 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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