Here's Why Burning Rock Biotech (NASDAQ:BNR) Must Use Its Cash Wisely
We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
Given this risk, we thought we'd take a look at whether Burning Rock Biotech (NASDAQ:BNR) shareholders should be worried about its 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'.
Check out our latest analysis for Burning Rock Biotech
Does Burning Rock Biotech Have A Long 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. When Burning Rock Biotech last reported its balance sheet in September 2023, it had zero debt and cash worth CN¥636m. Looking at the last year, the company burnt through CN¥677m. So it had a cash runway of approximately 11 months from September 2023. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. You can see how its cash balance has changed over time in the image below.
How Well Is Burning Rock Biotech Growing?
At first glance it's a bit worrying to see that Burning Rock Biotech actually boosted its cash burn by 20%, year on year. In light of that, the flat year on year operating leverage is a bit off-putting. In light of the data above, we're fairly sanguine about the business growth trajectory. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Burning Rock Biotech has developed its business over time by checking this visualization of its revenue and earnings history.
How Easily Can Burning Rock Biotech Raise Cash?
Since Burning Rock Biotech can't yet boast improving growth metrics, the market will likely be considering how it can raise more cash if need be. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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).
Since it has a market capitalisation of CN¥644m, Burning Rock Biotech's CN¥677m in cash burn equates to about 105% of its market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.
Is Burning Rock Biotech's Cash Burn A Worry?
Burning Rock Biotech is not in a great position when it comes to its cash burn situation. Although we can understand if some shareholders find its falling revenue acceptable, we can't ignore the fact that we consider its cash burn relative to its market cap to be downright troublesome. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. Taking a deeper dive, we've spotted 3 warning signs for Burning Rock Biotech you should be aware of, and 2 of them make us uncomfortable.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
