Here's Why We're Not Too Worried About Intra-Cellular Therapies' (NASDAQ:ITCI) Cash Burn Situation
We can readily understand why investors are attracted to unprofitable companies. For example, Intra-Cellular Therapies (NASDAQ:ITCI) shareholders have done very well over the last year, with the share price soaring by 153%. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given its strong share price performance, we think it's worthwhile for Intra-Cellular Therapies shareholders to consider whether its cash burn is concerning. 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'.
See our latest analysis for Intra-Cellular Therapies
How Long Is Intra-Cellular Therapies' 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 Intra-Cellular Therapies last reported its balance sheet in March 2020, it had zero debt and cash worth US$449m. Looking at the last year, the company burnt through US$144m. That means it had a cash runway of about 3.1 years as of March 2020. Importantly, though, analysts think that Intra-Cellular Therapies will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. Depicted below, you can see how its cash holdings have changed over time.
How Is Intra-Cellular Therapies' Cash Burn Changing Over Time?
In our view, Intra-Cellular Therapies doesn't yet produce significant amounts of operating revenue, since it reported just US$1.1m in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. With the cash burn rate up 14% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Easily Can Intra-Cellular Therapies Raise Cash?
While Intra-Cellular Therapies does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. 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).
Intra-Cellular Therapies' cash burn of US$144m is about 10% of its US$1.4b market capitalisation. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
So, Should We Worry About Intra-Cellular Therapies' Cash Burn?
As you can probably tell by now, we're not too worried about Intra-Cellular Therapies' cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 4 warning signs for Intra-Cellular Therapies that potential shareholders should take into account before putting money into a stock.
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.
This article by Simply Wall St is general in nature. 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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