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We can readily understand why investors are attracted to unprofitable companies. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So should Infinity Pharmaceuticals (NASDAQ:INFI) shareholders 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
How Long Is Infinity Pharmaceuticals' Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Infinity Pharmaceuticals last reported its balance sheet in June 2020, it had zero debt and cash worth US$43m. In the last year, its cash burn was US$40m. That means it had a cash runway of around 13 months as of June 2020. Notably, analysts forecast that Infinity Pharmaceuticals will break even (at a free cash flow level) in about 4 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. The image below shows how its cash balance has been changing over the last few years.
How Well Is Infinity Pharmaceuticals Growing?
Notably, Infinity Pharmaceuticals actually ramped up its cash burn very hard and fast in the last year, by 193%, signifying heavy investment in the business. If that's not bad enough, it actually saw operating revenue decrease by a whopping 94% over the last year, suggesting the company is going through some sort of dangerous transition. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. 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 Infinity Pharmaceuticals Raise More Cash Easily?
Since Infinity Pharmaceuticals can't yet boast improving growth metrics, the market will likely be considering how it can raise more cash if need be. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.
Infinity Pharmaceuticals' cash burn of US$40m is about 64% of its US$63m market capitalisation. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.
How Risky Is Infinity Pharmaceuticals' Cash Burn Situation?
There are no prizes for guessing that we think Infinity Pharmaceuticals' cash burn is a bit of a worry. Take, for example, its falling revenue, which suggests the company may have difficulty funding itself, in the future. While not as bad as its falling revenue, its cash runway is also a concern, and considering everything mentioned above, we're struggling to find much to be optimistic about. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. 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 4 warning signs for Infinity Pharmaceuticals that potential shareholders should take into account before putting money into a stock.
Of course Infinity Pharmaceuticals 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.
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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