Here's Why We're A Bit Worried About NGM Biopharmaceuticals' (NASDAQ:NGM) Cash Burn Situation
There's no doubt that money can be made by owning shares of unprofitable businesses. 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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for NGM Biopharmaceuticals (NASDAQ:NGM) shareholders is whether they should be concerned by its rate of cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. 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 NGM Biopharmaceuticals
When Might NGM Biopharmaceuticals Run Out Of Money?
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. As at September 2023, NGM Biopharmaceuticals had cash of US$166m and no debt. In the last year, its cash burn was US$141m. That means it had a cash runway of around 14 months as of September 2023. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. We should note, however, that if we extrapolate recent trends in its cash burn, then its cash runway would get a lot longer. The image below shows how its cash balance has been changing over the last few years.
How Well Is NGM Biopharmaceuticals Growing?
Some investors might find it troubling that NGM Biopharmaceuticals is actually increasing its cash burn, which is up 5.4% in the last year. It's even more troubling to see that operating revenue fell 61% during the period. Considering both these metrics, we're a little concerned about how the company is developing. 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.
Can NGM Biopharmaceuticals Raise More Cash Easily?
NGM Biopharmaceuticals revenue is declining and its cash burn is increasing, so many may be considering its need to raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Since it has a market capitalisation of US$50m, NGM Biopharmaceuticals' US$141m in cash burn equates to about 284% of its market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.
Is NGM Biopharmaceuticals' Cash Burn A Worry?
On this analysis of NGM Biopharmaceuticals' cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. Once we consider the metrics mentioned in this article together, we're left with very little confidence in the company's ability to manage its cash burn, and we think it will probably need more money. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 3 warning signs for NGM Biopharmaceuticals that potential shareholders should take into account before putting money into a stock.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, 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.
