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Just because a business does not make any money, does not mean that the stock will go down. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So, the natural question for Fulcrum Therapeutics (NASDAQ:FULC) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.
How Long Is Fulcrum Therapeutics' 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. In March 2022, Fulcrum Therapeutics had US$195m in cash, and was debt-free. Looking at the last year, the company burnt through US$86m. Therefore, from March 2022 it had 2.3 years of cash runway. Arguably, that's a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Fulcrum Therapeutics Growing?
Fulcrum Therapeutics boosted investment sharply in the last year, with cash burn ramping by 54%. On the bright side, at least operating revenue was up 32% over the same period, giving some cause for hope. On balance, we'd say the company is improving over time. 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.
Can Fulcrum Therapeutics Raise More Cash Easily?
Fulcrum Therapeutics seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. 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 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).
Fulcrum Therapeutics' cash burn of US$86m is about 26% of its US$330m market capitalisation. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.
So, Should We Worry About Fulcrum Therapeutics' Cash Burn?
On this analysis of Fulcrum Therapeutics' cash burn, we think its revenue growth was reassuring, while its increasing cash burn has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Fulcrum Therapeutics' situation. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Fulcrum Therapeutics (1 is a bit unpleasant!) that you should be aware of before investing here.
Of course Fulcrum Therapeutics may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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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.