There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So, the natural question for Intra-Cellular Therapies (NASDAQ:ITCI) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Does Intra-Cellular Therapies Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Intra-Cellular Therapies last reported its balance sheet in June 2019, it had zero debt and cash worth US$285m. In the last year, its cash burn was US$122m. Therefore, from June 2019 it had 2.3 years of cash runway. Notably, analysts forecast that Intra-Cellular Therapies will break even (at a free cash flow level) in about 4 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. Depicted below, you can see how its cash holdings have changed over time.
How Is Intra-Cellular Therapies's Cash Burn Changing Over Time?
Whilst it's great to see that Intra-Cellular Therapies has already begun generating revenue from operations, last year it only produced US$5.1k, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. Over the last year its cash burn actually increased by 21%, which suggests that management are increasing investment in future growth, but not too quickly. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Hard Would It Be For Intra-Cellular Therapies To Raise More Cash For Growth?
Given its cash burn trajectory, Intra-Cellular Therapies shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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).
Intra-Cellular Therapies's cash burn of US$122m is about 25% of its US$481m market capitalisation. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
Is Intra-Cellular Therapies's Cash Burn A Worry?
On this analysis of Intra-Cellular Therapies's cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that Intra-Cellular Therapies insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
Of course Intra-Cellular Therapies 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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