We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given this risk, we thought we'd take a look at whether Denali Therapeutics (NASDAQ:DNLI) shareholders should be worried about its cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
How Long Is Denali Therapeutics's Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In September 2019, Denali Therapeutics had US$479m in cash, and was debt-free. Importantly, its cash burn was US$27m over the trailing twelve months. So it had a very long cash runway of many years from September 2019. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.
How Well Is Denali Therapeutics Growing?
Denali Therapeutics managed to reduce its cash burn by 58% over the last twelve months, which suggests it's on the right flight path. But its revenue is better yet, flying higher than Elon Musk and his rocket, with growth of 4139% in the last year. Overall, we'd say its growth is rather impressive. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Hard Would It Be For Denali Therapeutics To Raise More Cash For Growth?
While Denali Therapeutics seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash to drive 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).
Denali Therapeutics's cash burn of US$27m is about 1.6% of its US$1.7b market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.
So, Should We Worry About Denali Therapeutics's Cash Burn?
It may already be apparent to you that we're relatively comfortable with the way Denali Therapeutics is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. And even its cash burn reduction was very encouraging. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Denali Therapeutics CEO is paid..
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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