Trailing twelve-month data shows us that Global Blood Therapeutics, Inc.'s (NASDAQ:GBT) earnings loss has accumulated to -US$198.5m. Although some investors expected this, their belief in the path to profitability for Global Blood Therapeutics may be wavering. The single most important question to ask when you’re investing in a loss-making company is – will it need to raise cash again, and if so, when? Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to raise further funds. This may not always be on good terms, which could hurt current shareholders if the new deal lowers the value of their shares. Global Blood Therapeutics may need to come to market again, but the question is, when? Below, I’ve analysed the most recent financial data to help answer this question.
What is cash burn?
Currently, Global Blood Therapeutics has US$659m in cash holdings and producing negative free cash flow of -US$144.8m. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Furthermore, it is not uncommon to find loss-makers in an industry such as biotech. The industry is highly competitive, with companies racing to innovate at the risk of burning through their cash too fast.
When will Global Blood Therapeutics need to raise more cash?
We can measure Global Blood Therapeutics's ongoing cash expenditure requirements by looking at free cash flow, which I define as cash flow from operations minus fixed capital investment, is a measure of how much cash a company generates/loses each year.
Free cash outflows declined by 34% over the past year, which could be an indication of Global Blood Therapeutics putting the brakes on ramping up high growth. If free cash outflows are maintained at the current level of -US$144.8m, then given the current level of cash in the bank, Global Blood Therapeutics will not need to raise capital any time within the next three years. Even though this is analysis is fairly basic, and Global Blood Therapeutics still can cut its overhead further, or borrow money instead of raising new equity capital, the outcome of this analysis still helps us understand how sustainable the Global Blood Therapeutics operation is, and when things may have to change.
Loss-making companies are a risky play, even those that are reducing their cash burn over time. Though, this shouldn’t discourage you from considering entering the stock in the future. The cash burn analysis result indicates a cash constraint for the company, due to its current level of cash reserves. This may lead to share price pressure in the near term, should Global Blood Therapeutics be forced to raise capital to fund its growth. I admit this is a fairly basic analysis for GBT's financial health. Other important fundamentals need to be considered as well. You should continue to research Global Blood Therapeutics to get a better picture of the company by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GBT’s future growth? Take a look at our free research report of analyst consensus for GBT’s outlook.
- Valuation: What is GBT worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether GBT is currently mispriced by the market.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 30 June 2019. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.
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