Here's Why We're Not At All Concerned With IGM Biosciences' (NASDAQ:IGMS) Cash Burn Situation
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. 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 IGM Biosciences (NASDAQ:IGMS) 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
View our latest analysis for IGM Biosciences
Does IGM Biosciences 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. As at March 2023, IGM Biosciences had cash of US$373m and no debt. Looking at the last year, the company burnt through US$29m. That means it had a cash runway of very many years as of March 2023. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. Depicted below, you can see how its cash holdings have changed over time.
How Is IGM Biosciences' Cash Burn Changing Over Time?
In our view, IGM Biosciences doesn't yet produce significant amounts of operating revenue, since it reported just US$1.6m in the last twelve months. 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. The 80% reduction in its cash burn over the last twelve months may be good for protecting the balance sheet but it hardly points to imminent growth. 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 IGM Biosciences To Raise More Cash For Growth?
There's no doubt IGM Biosciences' rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. 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 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).
IGM Biosciences has a market capitalisation of US$499m and burnt through US$29m last year, which is 5.8% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
Is IGM Biosciences' Cash Burn A Worry?
As you can probably tell by now, we're not too worried about IGM Biosciences' cash burn. For example, we think its cash runway suggests that the company is on a good path. And even its cash burn relative to its market cap was very encouraging. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. An in-depth examination of risks revealed 4 warning signs for IGM Biosciences that readers should think about before committing capital to this 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.
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