Here's Why We're Not At All Concerned With Intra-Cellular Therapies' (NASDAQ:ITCI) Cash Burn Situation
Just because a business does not make any money, does not mean that the stock will go down. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. 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 Intra-Cellular Therapies (NASDAQ:ITCI) shareholders should be worried about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for Intra-Cellular Therapies
When Might Intra-Cellular Therapies Run Out Of Money?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at September 2022, Intra-Cellular Therapies had cash of US$629m and no debt. Importantly, its cash burn was US$305m over the trailing twelve months. That means it had a cash runway of about 2.1 years as of September 2022. Notably, analysts forecast that Intra-Cellular Therapies will break even (at a free cash flow level) in about 2 years. So there's a very good chance it won't need more cash, when you consider the burn rate will be reducing in that period. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Intra-Cellular Therapies Growing?
At first glance it's a bit worrying to see that Intra-Cellular Therapies actually boosted its cash burn by 20%, year on year. Given that its operating revenue increased 167% in that time, it seems the company has reason to think its expenditure is working well to drive growth. If revenue is maintained once spending on growth decreases, that could well pay off! We think it is growing rather well, upon reflection. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
Can Intra-Cellular Therapies Raise More Cash Easily?
Even though it seems like Intra-Cellular Therapies is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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$5.2b, Intra-Cellular Therapies' US$305m in cash burn equates to about 5.9% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
How Risky Is Intra-Cellular Therapies' Cash Burn Situation?
As you can probably tell by now, we're not too worried about Intra-Cellular Therapies' cash burn. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. One real positive is that analysts are forecasting that the company will reach breakeven. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for Intra-Cellular Therapies that investors should know when investing in the stock.
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.
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