Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. By way of example, Momenta Pharmaceuticals (NASDAQ:MNTA) has seen its share price rise 193% over the last year, delighting many shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given its strong share price performance, we think it's worthwhile for Momenta Pharmaceuticals 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'. Let's start with an examination of the business' cash, relative to its cash burn.
How Long Is Momenta Pharmaceuticals' Cash Runway?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at March 2020, Momenta Pharmaceuticals had cash of US$463m and no debt. Importantly, its cash burn was US$234m over the trailing twelve months. So it had a cash runway of about 2.0 years from March 2020. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.
How Well Is Momenta Pharmaceuticals Growing?
Some investors might find it troubling that Momenta Pharmaceuticals is actually increasing its cash burn, which is up 46% in the last year. It's even more troubling to see that operating revenue fell 62% during the period. Considering these two factors together makes us nervous about the direction the company seems to be heading. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
Can Momenta Pharmaceuticals Raise More Cash Easily?
Momenta Pharmaceuticals 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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Momenta Pharmaceuticals' cash burn of US$234m is about 6.6% of its US$3.6b market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
Is Momenta Pharmaceuticals' Cash Burn A Worry?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Momenta Pharmaceuticals' cash burn relative to its market cap was relatively promising. 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 Momenta Pharmaceuticals' situation. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 3 warning signs for Momenta Pharmaceuticals that investors should know when investing in the 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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